Cash-on-Cash Return Calculator
Cash-on-cash returns enable investors to understand how profitable an industrial investment could be. Calculate yours with only three data points.
What Is a Cash-on-Cash Return?
A cash-on-cash return calculation, also known as a cash yield, is a relatively easy way for an investor to determine how profitable an investment could potentially be. Often compared to a return on investment or ROI calculation, cash-on-cash is different in that it only considers profits relative to paid investment costs. Appreciation, tax benefits, and many other variables are not included in cash-on-cash calculations.
What You Need to Calculate Cash-on-Cash Return
To determine your return, you need three figures.
First, you must calculate your annual pre-tax cash flow for the property. This will include your gross potential rent and any other income. Subtract your annual vacancy costs and operating expenses.
Second, you must have your annual total debt service costs, or mortgage payments.
Finally, you will need your total cash investment amount. Note that this figure is simply the amount of direct capital you have put into the asset. If you purchased a $10 million industrial property with a down payment of $2 million and $8 million in acquisition financing, your total cash investment would be $2 million, not $10 million.
With these data points handy, plug them in to the calculator below, or keep reading for more details about how the cash-on-cash return is calculated..
Cash-on-Cash Return Calculator
Cash-on-Cash Return Formula
Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Investment
Let’s use the $10 million industrial acquisition mentioned above as an example to illustrate how the formula works.
Your newly acquired 250,000-square-foot warehouse has a gross potential rent of $750,000 per year, plus an additional $10,000 per year in parking revenue. Thus, the property’s annual income would be $760,000 per year. You calculate your vacancy costs at $20,000 and operating expenses of $50,000, subtracting them from the income. This leaves you with $690,000.
In this example, let’s say your mortgage payments equal $400,000 each year. You can subtract this from the income as well, leaving you with $290,000.
Divide the pre-tax annual cash flow of $290,000 by the total amount of cash invested — in this case, $2 million — and your result is a cash-on-cash return of 14.5%.
Calculation Steps
Annual Pre-Tax Cash Flow = $760,000 - $470,000 = $290,000
Cash-on-Cash Return = $290,000 ÷ $2 million = 14.5%