There are several key metrics that whether you are buying a 2-4 unit rental property or a 25-unit apartment building you will want to have a firm grasp on. Cash-on-cash return is definitely one of them…

Have you ever watched ABC’s show “Shark Tank?” If you listen closely one of the more popular reasons they pass on investment opportunities is they do not see a clear enough path and/or timeline by which they are going to get their money invested back. While they aren’t evaluating real estate the thinking is the same when it comes to cash-on-cash return.

Rate of return is a phrase you will hear a lot when people are trying to determine whether to move forward with an investment. Rate of return is just a fancy way to say “how quick am I going to get my money invested back in my pocket.” it is a way to project out for any period of time the rate at which that money will be returned to you. This is a metric more commonly used when evaluating commercial real estate (5 units or more), but I find it is a good tool to use in the 2-4 unit multi family asset class also.

The Cash-on-Cash Return Formula

Cash-on-Cash Return= Annual Pre-Tax Cash Flow/Actual Cash Invested

Real Life Example on How Cash-on-Cash Return Works

Let’s say you bought a 4-plex for $400,000 and your down payment was 25% which would be a $100,000 down payment. Actual cash invested = $100,000.

You are projectng that investment to yield $20,000 in annual pre-tax cash flow.

$20,000 (pre-tax cash flow)/$100,000 actual cash invested = 20% cash-on-cash return

This tells you that based on your projections you will have all of your money you invested returned to you in 5-years if you make the decision to invest in that project.

Good and Bad of Cash-on-Cash Return as a Metric

Good: It is very easy to figure out and can give you a good basis as to if the investment is worth looking into further. Set a minimum cash-on-cash return you are looking for from an investment and compare it to how the investment opportunity projects over time.

Bad: Cash-on-Cash return does not take into account taxes and this is simply because everyone’s tax situation is different because we are all in different tax brackets. The higher percentage bracket you are in based on your income the more it will impact your bottom line once taxes are figured into the equation.