In real estate, the cash-on-cash return helps property owners measure cash-flow on a pre-tax/after-debt services basis relative to the owners’ invested equity. It can be used to gage investment performance and forecast projected earnings and expenses in the future.
While this metric assesses the potential cash distributions over the life of an investment, it focuses on return for specific periods, such as the current year or quarter. Therefore it is especially important for owners who plan, expect or need to live off the income from their investment property over a long period of time. When commercial real estate investments involve long-term debt-borrowing, the actual cash return will differ from the standard return on investment ROI. Calculations based on standard ROI take into account the total return on an investment. Cash-on-cash return, on the other hand, only measures the return on the actual cash invested, providing a more accurate analysis of the investment’s performance.
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