Cash on Cash Return is a financial metric used by real estate investors to evaluate the profitability of an investment property. It measures the annual return on the cash invested, helping sellers understand how attractive their property might be to potential investors.
What is Cash on Cash Return?
Cash on Cash Return is calculated by dividing the annual pre-tax cash flow from a property by the total amount of cash invested. It provides a percentage that indicates how much cash income an investor can expect relative to their initial investment.
How to Calculate Cash on Cash Return
The formula for Cash on Cash Return is:
Cash on Cash Return = (Annual Cash Flow / Total Cash Invested) x 100
For example, if an investor puts $50,000 into a property and receives $5,000 in annual cash flow, the return is:
($5,000 / $50,000) x 100 = 10%
Why is Cash on Cash Return Important for Sellers?
Understanding Cash on Cash Return helps sellers position their property as an attractive investment opportunity. A higher return indicates better profitability for investors, making the property more appealing.
Tips for Increasing Attractiveness to Investors
- Improve property condition to increase rental income.
- Reduce expenses to boost cash flow.
- Offer flexible financing options.
- Highlight potential for appreciation.