Duane Roberts 
When it comes to evaluating investment deals, cash on cash return is a concept every investor should understand. It provides a straightforward way to measure the profitability of an investment property relative to the amount of cash invested. Knowing what is good cash on cash return is essential for making informed decisions and maximizing your financial gains.
Understanding Cash on Cash Return
Cash on cash return is a metric that compares the annual pre-tax cash flow of an investment property to the total cash invested. This calculation is valuable for investors seeking to understand how effectively their money is working for them. Unlike other metrics, it specifically assesses the return on the actual cash invested, excluding loan amounts or mortgage balances.
For instance, if you invest $100,000 in a property and it generates $12,000 in annual pre-tax cash flow, your cash on cash return is 12%. This straightforward calculation highlights how much you earn as a percentage of your cash investment.
Why Cash on Cash Return Matters
Knowing what qualifies as a good cash on cash return ensures you are not only preserving your capital but also realizing significant monetary gains. Investors often use this metric to compare various deals, assess opportunities, and identify properties that align with their financial goals.
Understanding good cash on cash returns can also guide your investment strategy, ensuring prudent use of resources and calculated risk-taking.
1. Helps Evaluate Potential Deals
One of the primary benefits of understanding cash on cash return is its ability to help evaluate potential deals. By calculating this metric, you can quickly determine if a property offers returns that justify the investment. Properties with a higher cash on cash return generally ensure a better alignment with profitable outcomes.
2. Encourages Smarter Decision-Making
When you have clear benchmarks for what constitutes a good cash on cash return, it’s easier to make smarter investment decisions. For example, most investors aim for cash on cash returns between 8% and 12%, but this can vary depending on the investment type and market.
Having these numbers in mind helps you avoid overpaying for a property or entering deals that may not deliver the desired returns. Real estate investments often tie up significant amounts of cash, so understanding cash on cash return guides you towards opportunities that make your money work harder.
3. Ensures Prudent Use of Capital
Whether you are using your own funds or leveraging a mix of cash and financing, calculating cash on cash return helps ensure the prudent use of capital. By keeping an eye on this metric, you can better evaluate whether the property’s performance will provide sufficient returns to justify the investment.
4. Simplifies Portfolio Analysis and Comparison
For investors managing multiple properties or planning future acquisitions, cash on cash return provides a simple yet effective way to compare portfolio performance. By evaluating which investments deliver the best returns, you can focus on strategies and properties that maximize profitability.
The Bottom Line
Understanding good cash on cash returns equips you with the insights to guide smarter investment decisions. It simplifies the evaluation process, ensures the prudent use of resources, and fosters confidence in your ability to manage investment opportunities. By leveraging cash on cash return, you’re setting yourself up with a solid framework for assessing profitability and growing wealth through informed, strategic choices.