what does cash on cash mean?

Cash on cash return (CoC return) is a financial metric used in real estate investing to evaluate the profitability of an investment property based on the cash flow generated relative to the amount of cash invested. We can use before or after tax, but I find after tax is a more useful metric. It measures the annual after tax cash flow generated by the property as a percentage of the initial cash investment.

The formula for calculating cash on cash return is:

CoC Return = Annual After Tax Cash Flow / Initial Cash Investment x 100%

So if a property cost $500,000 and we paid a total of $100,000 of our own cash to purchase, and it was returning $25,000 rent per annum after tax the cash on cash return would be calculated as follows:

CoC Return = $25,000 / $100,000 x 100% = 25%

The "annual after tax cash flow" typically includes rental income minus operating expenses such as property taxes, insurance, maintenance, and property management fees. The "initial cash investment" refers to the total amount of cash contributed by the investor to acquire the property, which may include the deposit, closing costs, and any renovation or improvement expenses paid in cash.

Cash on cash return provides investors with a clear measure of the return generated by their cash investment in a property, excluding any financing or leverage effects. It helps investors assess the cash flow potential of a property relative to the amount of capital they have invested upfront. A higher cash on cash return indicates a more favorable return on investment, while a lower cash on cash return suggests that the property may not be generating sufficient cash flow relative to the initial investment.