Valuation and Analysis, 14% of the examination
Cash-on-cash return
Annual before-tax cash flow divided by the investor's actual cash invested.
Unlike a capitalization rate, cash-on-cash return includes the effect of financing because debt service reduces the cash flow to the investor. Keep the period consistent and do not divide NOI by cash invested.
What this is confused with
The exam rarely asks for a definition. It describes a situation and offers two terms that both sound plausible.
Capitalization rate
Cap rate uses NOI and property value without debt service. Cash-on-cash uses cash flow after debt service and cash invested.
See also
Test the distinction
A relevant question from Valuation and Analysis, selected because its facts or explanation use this concept.
An investor pays $1,500,000 for a property with an NOI of $105,000 and annual debt service of $72,000. What is the cash-on-cash return on a $400,000 down payment?
Written to DRE's published topic list. Not a real examination question, since reproducing those is a misdemeanor under B&P Code section 123.
Primary sources
Use these authorities when a course summary, forum answer, or older flashcard conflicts with the current California rule.