Example

A property you are considering has a CFAT of $11,294 and requires a $53,000 investment. What is the cash on cash?

It's 21.3%.

Cash on Cash

Many investors use the cash on cash rate of return. It takes the cash invested in the property and compares it with the cash flow after tax (CFAT) for the first year.

(There are many who use cash on cash as a before-tax rate of return.  When used that way, however, it is identical to the equity dividend rate. It doesn't make sense to duplicate another rate and then misname it. Therefore, use CFAT for cash on cash.)

Someone desiring to receive regular cash flow from a property might use this indicator routinely.

Formula:   CFAT ÷ Equity

Explanation

Many investors use the cash on cash rate of return. It takes the cash invested in the property and compares it with the cash flow after tax (CFAT) for the first year. This is simply an after-tax version of the equity dividend rate.

Although someone desiring to receive regular cash flow from a property might use this indicator routinely, this rate of return does not take into account equity buildup.