Cash on Cash Return
Cash-on-Cash Return measures the annual return on the equity invested in an income producing property. It is calculated by dividing pre-tax cash flow by the amount of equity invested and is expressed as a percentage. For example, if pre-tax cash flow for an investment property is $40,000 and equity invested in the property is $500,000, the Cash on Cash Return is equal to 8%.
| Cash-on-Cash Return = | Pre-tax Cash Flow | x 100 |
| Equity Invested |
| 8% = | $40,000 | x 100 |
| $500,000 |
Cash-on-Cash Return is used to evaluate the profitability of income producing properties. It can be useful when comparing investment properties, but is just one of many analysis tools. It only considers pre-tax cash flow and does not take into account an investor's individual income tax situation or the appreciation potential of a property. For example, property "A" may have better Cash-on-Cash Return than property "B", but property "A" may not appreciate as fast because it is located in a slower growing market.
There is a significant amount of attention paid to Cash-on-Cash Return in the TIC marketplace. Because of this, TIC sponsors strive to make Cash-on-Cash Returns as high as possible. As a part of our due diligence, Liberty Group evaluates the financial projections and assumptions of TIC offerings to make sure the Cash on Cash Return is not inflated through invalid assumptions or "financial engineering."
