What does cash-on-cash return measure?

Cash-on-cash return is a financial metric specifically used to evaluate the profitability of real estate investments. This measurement focuses on the relationship between the money that an investor puts into a property and the cash income the property generates.

By calculating the ratio of annual before-tax cash flow to the cash invested, investors can gauge the efficiency and effectiveness of their investment. Essentially, this metric provides insight into how much cash income an investor is earning relative to the cash they have initially invested in the property. A higher cash-on-cash return indicates a more profitable investment relative to its cost.

This measurement is particularly critical for real estate investors as it directly links the cash generated by the property to the initial investment, helping them make informed decisions about where to allocate their capital. The other options, while related to finance or real estate, do not specifically define what cash-on-cash return measures. For instance, comparing annual returns on stocks to real estate does not provide a clear view of cash flows related to an individual property investment, and net income earned from property after selling costs or profit margins on property flips relate to overall profitability rather than direct cash yields.