A common metric for measuring commercial real estate investment performance is the cash-on-cash return, which is sometimes also referred to as the cash yield. It can provide useful insight into the business plan for a property and the likelihood of receiving regular cash distributions over the course of an investment. However, it is important to remember distributions are never guaranteed.
The cash-on-cash return rate is calculated by dividing the annual pre-tax cash flow by the total cash invested. For example, if an investor puts $100,000 cash into the purchase of an apartment building and the annual pre-tax cash flow they receive is $10,000, then their cash-on-cash return is 10%.
The cash-on-cash return is typically a measure of operational cash flow and, therefore, excludes any profits realized from a capital event such as a sale or refinance.
Although the cash-on-cash return may help to quantify cash distributions, one key point is that any forward-looking cash-on-cash return is targeted, not promised. In other words, it is not an obligation and it is not guaranteed.
Even though it is targeted, the cash-on-cash return can be a useful metric to estimate the distributions* that an investor might receive over the course of the investment period. The cash-on-cash return is also distinct from the preferred return, which is an annual return priority.
For more information on cash-on-cash returns, refer to this article: What is a Cash-on-Cash Return?
* Distributions are not guaranteed.