Cash on Cash Return

Cash on cash return is annual pre-tax cash flow after the mortgage divided by the cash invested. It is the other napkin test listed alongside gross rent multiplier in a property investment calculator, and the one that answers the question GRM cannot: what does my money earn after expenses and the loan.

GRM needs price and rent. Cash on cash needs price, rent, vacancy, every expense, the down payment, closing costs and the loan terms. The first takes thirty seconds and the second takes a spreadsheet, which is why they come in that order.

Under typical expenses and a 25% down loan at 7% rates, a GRM of 8 produces a cash on cash return around 8 to 10%; a GRM of 10 lands near 3 to 5%; a GRM of 12 is usually negative. The mapping shifts with taxes, dues and the rate, so treat it as a rule of thumb for which listings to run the full calculation on.

Further reading: Cash on Cash Return on Wikipedia.