Power of Residential Property Investment

Your cash on cash return is a ration that allows you to see what your annual return would be on your cash invested for the down payment. For example, let’s say you purchased a commercial property for $1,000,000 with a 20% down payment of $200,000. From the example above, the property is generating $20,000 a year in positive cash flow. Based upon these numbers, your cash-on-cash return would be 10%. See Below:

Cash Flow: $20,000

(divided by) Down Payment: $200,000

(equals) Cash-on-Cash Return: .10 or 10%

Now this example gave you the cash on cash return based off of your down payment, however, if you wanted to be more accurate with your return, you would include your total acquisitions costs and not just your down payment. So you would take the cash flow and divide it by your total acquisition costs which would include down payment, closing costs, soft costs, etc.

This number is very important to investors because it symbolizes how long it will take for investors to recoup their principal investment. Depending on your market and the needs of your investors, you will probably want to acquire properties that generate at least a 12% cash-on-cash return for you and your investors. This will allow your investors to get a good upfront return on their capital and still have the potential for greater returns if the property sells at a profit at a later point in time.

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