What is the Definition of Cash on Cash Return?

One of the key questions asking on investment property forums is what does cash on cash return or return on investment (ROI) mean.

After reading this web page you should have a much better understanding of ROI and how to calculate it. As well as knowing how to utilise it in your property career.

Lets cut straight to the chase.

Cash on cash return is calculated using the formula ‘cash flow before tax divided by cash invested in the deal', and is expressed as a percentage. Cash flow before tax means the rental minus operating expenses: operating expenses including things like your mortgage interest costs, insurances and void periods etc.

Calculating your cash on cash return basically tells you how much cash you could potentially make in a year as a percentage of the money you have invested. For example, you are getting £2000 pa in cash flow before tax and you invested £15,000 in the deal to begin with. So here is how that would work out on a return on investment basis.

£2000/£15,000 = 13% return on investment

This is quite low; you should really be aiming for 30% upwards on a cash on cash return. For example, you are getting £2,500 pa net and you put in £8,000.

£2,500/£8,000 = 31% cash on cash return

Ideally you want to end up in a situation where you have no cash invested in the deal; this provides an infinite return on investment.

There are many ways you can end up with no cash in the deal. If you search our website you will find most of the more popular ones and you may even find some little known ways that only the top property gurus know about.

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It all depends on what your goals are how much risk you are prepared to take to get there. If you are risk averse and just want to do things the simple way then you would simply buy a property that is in need of some sort of refurbishment or renovation work. You would then do this work and draw out a profit and all the capital you had invested in the property.

This is a very simplistic way to look at it and there is obviously a lot more to it and you need to make sure that you pick the right location, the right property, at the right time and you need to make sure that you do your sums right. But in essence if you could do all the above correctly, and were able to pull out all your initial start up money, you would end up with an infinite return on your investment.

Doing things in this way is called forcing the appreciation of a property. This is why property is such an amazing investment. You can end up owning an asset very quickly without any money of your own investing in it.

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