Difference Between Cash On Cash Return And ROI
One thing that puzzles me a bit is the difference between "cash on cash return" and "return on investment." I was always under the impression that they were the same - can anyone enlighten me?
Thanks in advance.
Cash on Cash return is the before tax cash flow divided by the cash outlay for acquisition-- usually expressed as a percentage. If you put $20K down on a piece of property and it gives you a cash flow of $1000 a year this is a cash-on-cash return of 0.05 or 5%.
Return On Investment can be a bit more complicated because there are different flavors of return depending upon what is counted. For real estate it may include both cash flow and appreciation and again this is divided by the cash outlay. Using the above example, assume that the purchase price was $100K and a year later it is worth $105K. The return on investment is $5K (appreciation) + $1K (cash flow) divided by $20K (down payment) = 6/20 = 0.3 or 30% ROI. When you are evaluating ROI, be sure to ask what is included in the return.[ Edited by edmeyer on Date 05/21/2005 ]
Thanks very much for clarifying - that makes it much easier to understand. Thanks again.