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What is a Cash-on-Cash Return?

Updated: May 11

A common measure for measuring the performance of commercial real estate investments is cash return, which is sometimes also called cash return. The cash rate of return can provide useful insight into a property's business plan and the likelihood of receiving regular cash distributions while investing. A common measure of how commercial real estate investments perform is cash, which we sometimes call cash return.

This is a straightforward calculation that is achieved by dividing the annual cash flow before tax by the total amount invested. For example, if an investor invests $100,000 in cash to buy a residential property and the annual pre-tax cash flow, they receive is $10,000, then their cash-on-cash return is 10%.

Cash-on-cash return = annual pre-tax cash flow / total cash invested

Return on cash is generally a measure of operating cash flows and therefore excludes any realized benefit from a capital event such as sale or refinancing. While cash yield can help quantify an important point that investors should acknowledge is that any forward-looking cash returns are not promised, but targeted.

In other words, it is not an obligation. For example, the cash-on-cash yield is different from a coupon or debt payment, which is a regular payment that an operator must comply with, regardless of changes in the business plan or contingencies. Therefore, investors should exercise caution in assimilating a targeted cash yield to a debt coupon. Actual cash yield may be greater or less than the intended number.

While this is a targeted measure, cash-on-cash return is the most useful metric to estimate the distributions that the investor may be entitled to during the investment period.

Cash performance is also distinguished from preferred performance, which is an annual reporting priority that can or cannot be paid up-to-date and may not reflect actual money to be paid each year. The cash yield can provide valuable information about a property's business plan and the probability of receiving regular distributions of funds during a placement.

This metric is commonly used in commercial real estate for calculating annual performance. I define cash returns and point out that they are often misconstrued as distribution returns.

In previous post: "What is a Preferred Return?"

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