Cash-on-Cash is the ratio of cash flow before tax to the total amount of cash invested.  It is often used to evaluate cash flow from income producing properties particularly in situations where cash flow is of paramount importance to the investor. Cash-on-Cash can also be used to determine if a property is undervalued resulting in instant equity in a property.

Cash-on-Cash Return = Annual Before-Tax Cash Flow / Total Cash Invested (Initial Equity Investment)

Here are the pros and cons of using Cash on Cash to compare investment alternatives:

Pros:

1. Easy to use
2. Many investors are focused on cash flow
3. Adjusts for vacancy and credit losses, operating expenses, and financing

Cons:

1. Because it uses before-tax cash flows, it does not account for an investors’ tax situation
2. Does not account for appreciation or depreciation in value
3. Does not account for other risks associated with the subject property
4. Uses simple interest calculation which ignores the effect of compounding interest