Cash on Cash Return is a type of the metric system that measures the Total Return earned on the real investment property. And, the return is the total cash Income earned on the investment of the property.
In simple words, cash on cash return is earned by the investors by Investing money in the property. It is calculated as the ratio of the total amount of rental income generated by the property, along with the total cash investment initially invested in the property.
Cash on Cash Return= Annual before Tax cash flow/ Total Cash Invested
Cash on cash return is the equity dividend rate which measures the ratio of cash earned cash invested. The measure does not include the debt associated with the purchase of the property, which is a common financing instrument in real estate.
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To understand the term better, let's take an example below-
For instance, understand if an investor purchases a rental property of Rs. 20 lakh with a down payment of Rs. 5 lakh. He receives a monthly rent of Rs. 8000 and pays interest charges of Rs. 4000 every month.
The monthly expense of the investor= 8000 - 4000= Rs. 4000
The annual income= 4000* 12= Rs. 48,000
Cash on cash return= 48000/500000 =