Cash on cash return is a calculation that determines the cash income based on cash invested, most often associated with real estate and income producing property. Cash on Cash Return is a ratio of annual before-tax cash flow to the amount of cash invested.
Cash on Cash Return = Annual Before-Tax Cash Flow/ Total Cash Invested
For example, an investor purchases a Condominium Complex for 1,500,000 putting down a cash payment of 500,000. Income from rentals, minus expenses, equals 15,000. Annually, 15,000 multiplied by 12 months per year equals 180,000 annual before-tax cash flow.
Cash on Cash Return = 180,000/ 500,000 x 100 = 36%