Can someone explain to me what the term 'cash-on-cash' means?

Cash on Cash Return is the property's annual net cash flow divided by your net investment, expressed as a percentage.

EXAMPLE:

If the net cash flow from a property is $10,000, and the cash invested in the property is $100,000, then the Cash on Cash return is calculated to be 10% ($10,000/$100,000). The net investment in property is the cost of the property less the amount you borrowed.

A way to view this ratio is to compare it to a return of a certificate of deposit. You deposit money in the bank and the bank pays you an annual return, say 5%. The 5% is the Cash on Cash ratio.

Please note that the Cash on Cash return does not include property appreciation which is a non-cash flow item until the year of sale. So therefore, if you are evaluating a property on a long-term basis, you need to focus more on the annual cash flow as it relates to your investment, and focus less on property appreciation.

Scott

When looking at cash-on-cash returns for commercial property you would be wise to compare it to the S&P 500's performace as opposed to CD rates.

The worst 10-year return on the S&P 500 index was a 12.3 percent gain for the 1965-74 period.

When running your numbers try and project 10 years out. This period of analysis is best because most commercial mortgages either have a "bullet" in the 10th year or the rate begins to adjust.

If over that 10 year period your cash-on-cash return in not atleast 123% you should look at another property.

After all investments are about making money. Why invest in a piece of real estate that is not going to give you the same ROI as another investment vehical with the same proven track record?

As a rule of thumb you should be looking for 15% cash-on-cash return (min.) 30% is ideal.