How do you calculate cash-on-cash return for a property investment?

• A. Cash-on-cash = annual cash flow after taxes / total project cost
• B. Cash-on-cash = annual before-tax cash flow to equity / initial equity investment
• C. Cash-on-cash = cash flow / equity
• D. Cash-on-cash = net income / equity

Answer: (B)

Cash-on-cash return measures the cash yield you earn on the actual money you invest as equity in a property, using annual before-tax cash flow to equity divided by the initial equity investment. In practice, you take the property's NOI, subtract annual debt service (the mortgage payments) to get the cash flow to equity before taxes, and then divide that by what you personally put in upfront as equity. This gives you a simple annual percentage return on the cash you tied up, focusing on cash generation rather than taxes, financing structure beyond debt service, or appreciation.

Example: If NOI is 120,000 and annual debt service is 60,000, the before-tax cash flow to equity is 60,000. If your initial equity investment is 300,000, the cash-on-cash return is 60,000 / 300,000 = 20%.

This metric excludes after-tax effects, appreciation, and non-cash accounting items, which is why it’s not based on total project cost, after-tax cash flow, or net income.