Twelve Per Cent Cash-on-Cash, and Six Per Cent for the Same Building

What the ratio leaves out in both directions

Part of the 9,000 paid to the bank each year is principal, and that part is not lost — it converts debt into equity and is invisible here, so the leveraged buyer's total return is understated. Pulling the other way, the ratio ignores the boiler, the roof and the rewiring, which arrive in lumps every several years and can consume a whole year's cash flow on their own; it ignores tax, which is not the same for a company and an individual; and it ignores whether the property is worth more or less than it cost. Cash-on-cash is a good measure of one specific thing — how hard this year's cash is working — and a bad substitute for a return.

Count every euro that left the account at purchase

The denominator is the cash invested, and it is almost always larger than the deposit. Transfer taxes and notary or legal fees, the survey, the arrangement fee on the loan, the work done before the first tenant moved in, and the months of holding costs before any rent arrived all belong in it. On a 50,000 deposit those extras can easily add ten or fifteen thousand, which turns a 12 % return into something closer to 9 %. Anyone comparing two deals should ask what went into the denominator before comparing the percentages, because the more optimistic figure is usually the one that counted only the deposit.

Frequently asked questions

How does this differ from the capitalisation rate?

The capitalisation rate divides net operating income by the property's value — 15,000 ÷ 250,000 = 6 % here — and deliberately ignores how the purchase was financed, which is what makes it useful for comparing buildings. Cash-on-cash divides the cash left after the loan by the cash put in, which is what makes it useful for comparing what an investor's own money is doing. The two answer different questions and coincide only for a buyer who borrowed nothing, which is exactly the second line of the table above.

Should the cash flow be the first year or an average?

The first year is what the ratio conventionally reports, and it is the least representative one — rent is fresh, nothing has broken yet, and the void allowance is a guess. An average across several years, with a maintenance reserve and a realistic vacancy assumption in it, gives a number that is lower and far more useful. Quote the first year if a convention demands it, but decide on the average, and be suspicious of any listing where the two are not both shown.