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 $105,000 annual NOI and $72,000 annual debt service. If the $400,000 down payment is the entire cash investment and there are no other cash-flow adjustments, what is the annual before-tax cash-on-cash return?
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.