Cash-on-Cash Return formula equals?

• A. Cash-on-Cash Return = Cash Invested / Annual Before-Tax Cash Flow
• B. Cash-on-Cash Return = Annual After-Tax Cash Flow / Cash Invested
• C. Cash-on-Cash Return = Annual Before-Tax Cash Flow / Cash Invested
• D. Cash-on-Cash Return = NOI / Cash Invested

Answer: (C)

Cash-on-Cash Return measures how much cash an investor receives in a year relative to the cash they actually invested in the deal. The best formula uses annual before-tax cash flow divided by cash invested. The annual before-tax cash flow is what’s left after operating expenses and debt service, i.e., NOI minus debt service, giving the real cash you have available before taxes. Cash invested is your initial equity outlay (down payment, closing costs, rehab), not the total property price or loan amount.

Why this fits: it focuses on the cash yield you get from your actual equity, disregarding tax effects and appreciation. Using NOI would omit debt service, overstate the return. Using after-tax cash flow introduces tax effects and becomes a different measure. Using the inverse would not represent a yield at all. For example, if you invested $100,000 and generate $12,000 of before-tax cash flow in a year, the cash-on-cash return is 12%.