Investing Blog

Cash on Cash Return by Jordan at Investing Blog

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One of the most important elements of a good business deal, whether a leveraged buy out or an investment in real estate is the cash on cash return.

Calculating Cash on Cash Returns

Cash on cash return calculations are very important for any leveraged investment. With the availability and low price of credit, you can bet that all over the country individual and institutional investors are looking at the cash-on-cash returns of various investment opportunities.

Calculating a cash on cash return is a simple division problem. Before tax cash flow divided by the cash investment equals cash on cash return.

So, if you were to buy a $1 million business that generates $300,000 in annual income, and put up $100,000 as a down payment, your cash on cash return would be 300% annually. That is, you would get 3 times your cash investment back per year, but not a 300% return on your entire investment.

Real estate investors like to use the cash on cash return equation in tandem with the 50-2 rule.

Some disadvantages

A cash on cash return for one investor may not be the same for another. Since cash on cash returns are calculated with pre-tax cashflow, differing tax brackets will produce different returns. This proves especially important when cash on cash return figures are offered as part of a business listing.

Also, the cash on cash formula does not include appreciation of assets. Using the same example of the $1 million business with $300,000 in annual income, or cashflow, a doubling of value of the business to $2 million would not affect the cash on cash return. Total returns may be understated.

About Jordan

Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here.

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