Cash-on-cash return

A year of cash flow after financing, divided by the cash actually invested - deposit plus purchase costs - rather than by the price of the asset.

Example

The same building returning -5.2739%, 1.5035% and 4.0961% at loans of 225,000, 130,000 and nil.

Important

It measures the financing as much as the property. If an appraisal changes completely when the loan changes, it was an appraisal of the loan - which is why it is worth running with no borrowing at all every time.

Related terms

• Debt service coverage ratio — Net operating income divided by the annual mortgage payments. Below 1.00 the asset does not pay for its own borrowing.
• Leverage — Investing with borrowed money so that you control more of an asset than your own capital would buy. Gains and losses are both multiplied by the same factor.
• Net operating income — Rent or trading income after every cost of running the asset except financing - management, maintenance, insurance, tax and an allowance for periods standing empty.

Lessons that explain it

• Appraising one property: the numbers, the condition, the tenant and the exit — Seven checks on one specific building. The two that decide most outcomes - the deduction list and whether the income covers the borrowing - are the two that never appear in a listing. (14 min)

All 578 terms in the Investing glossary