How cash-on-cash return works

Cash-on-cash return asks how much cash the property threw off this year, as a percent of the cash the buyer actually put in:

$$\text{cash-on-cash} = \frac{\text{annual cash flow}}{\text{cash invested}}$$

On $1,960 of cash flow and $80,000 of cash invested, the return is 2.45 percent.

Cash invested is typically down payment plus closing costs paid in cash, minus credits. This sheet treats it as a single input. How rental cash flow works is where the $1,960 came from.

Keep cash flow at $1,960 and cut cash invested to $60,000. The quotient is 3.2667 percent. The property did not throw off more cash. The buyer put in less cash, usually by borrowing more.

That is why cash-on-cash can rise while risk rises. More debt can lift the percent and also lift the chance that cash flow turns negative. How leverage ratio works is the balance-sheet view of that debt.

The cash-on-cash calculator on this page is leftover cash over the equity cheque. The cap rate calculator is NOI over price, which does not know the equity cheque. Cap rate and cash-on-cash are both yields. They are not the same yield.

Internal rate of return uses the full cash-flow path, including sale. Cash-on-cash is one year's leftover over the cash that went in. How NPV and IRR work is the full-path object.

Cap rate uses purchase price in the denominator and NOI in the numerator. Cash-on-cash uses cash invested and cash flow after debt service. A cheap loan can lift cash-on-cash while cap rate, which ignores the loan, does not move.

Cash flow is the numerator. If that numerator is negative, cash-on-cash is negative, which means the equity cheque is being fed, not paid.

The two teaching rows are $1,960 on $80,000, which is 2.45 percent, and $1,960 on $60,000, which is 3.2667 percent. They are not a closing-cost inventory, not tax, and not a sale. This is educational material, not financial advice.