Cash-on-cash return is a useful tool to help make investment decisions. Investors calculate cash-on-cash return to measure the rate of return on an investment based on the amount of cash they initially invest. It is often used to measure the profitability of projects that require a set cash outlay and have predictable cash flows, such as buying investment real estate. It is calculated by dividing net income before taxes by the amount of cash invested.
Calculate gross annual income. This is the sum of all the cash flows received. For example, if your rental property produces $2,000 of rent each month, your gross annual income would be $24,000 ($2,000 x 12 months = $24,000).
Calculate net income before taxes. Subtract all the annual operating expenses from the gross income to get this figure. For example, if the total expenses equal $10,000, your net income before taxes would be $14,000 ($24,000 - $10,000 = $14,000).
Divide net income before taxes by your initial cash outlay. Multiply the result by 100 to get a percentage. This equals your cash-on-cash return. If you initially put $100,000 into the investment, your cash-on-cash return would be 14 percent ($14,000 / $100,000 = 14 percent).
Compare cash-on-cash returns from one investment to another. The one with the higher return is usually the better investment.
Make sure your gross income and operating expenses are as accurate as possible. Calculating cash-on-cash return is only as accurate as the numbers you use.