The Real Estate Investor's Complete Guide to Cash on Cash Return

Cash-on-cash is a rather popular return many real estate investors use for real estate investment analysis because it is easy to compute.
Nonetheless, many investors who forego real estate investment software and attempt to make the calculation themselves are doing it wrong, and therefore it seems appropriate to discuss it.
What is the Cash on Cash Return?
Cash-on-cash measures the ratio between the cash flow a real estate investment property is anticipated to collect during the first year of operation and the amount of cash investment the real estate investor initially makes to purchase the property.
Often, where many real estate investors go wrong when computing cash on cash is not to correctly compute the amount of initial cash investment made to purchase the property. Namely, down payment, loan points, and cost of acquisition (escrow and title fees, appraisal, and inspection costs).
Instead, real estate investors tend to consider only the down payment as the cash investment and ignore inclusion for loan points and other costs associated with the purchase like escrow and title fees.
Perhaps not a major deal, but anyone seeking to compute cash on cash correctly, and as accurately as most real estate investing software solutions, should make the adjustment.
How to Calculate Cash on Cash
Cash on cash is relatively straightforward. Cash Flow divided by Initial Investment equals Cash on Cash Return.
The result is expressed as a percentage. For example, $5,000 cash flow divided by $100,000 cash investment equals 5.0% cash on cash return (or CoC as most APOD's and proformas might show it).
How to Use Cash on Cash during the Real Estate Investing Process
Cash on cash enables the real estate investor to gauge the profitability of one investment opportunity to another quickly. Regardless whether the investment opportunity is residential or commercial real estate or another-type investment, cash on cash is a suitable way to measure the return on cash invested to the anticipated first year's cash flow.
Cash on cash enables the real estate investor to compare similar real estate investment properties easily. Again, whether the investor is considering the purchase of residential or commercial real estate, cash on cash helps the investor to measure and compare returns various real estate investment properties might yield.
Summary
Not unlike most returns useful for real estate investing, by itself, cash on cash should not be used to decide whether a property is fit to buy.
Moreover, in as much as it does not account for time value of money, cash on cash is primarily useful to a real estate investor one time during a real estate investing analysis--as a measurement of the first year cash flow, not future year's cash flows.
Nonetheless, cash on cash is not without advantage, and real estate investors would benefit to compute it when making real estate investing decisions, to work with real estate professionals who can compute it, or when deciding to purchase real estate investor software to be sure the software includes it.