Glossary / Property

Cash on cash return

Cash on cash return is the annual cash left after every running cost and every mortgage payment, divided by the cash the buyer actually put in, which makes it the only property return figure that answers what your own money earned.

Where net yield measures the property, cash on cash measures your position in it. A leveraged purchase and an unleveraged one can have identical net yields and completely different cash on cash returns.

It rises with leverage while rates are below the yield and collapses when they are not, which is the whole of the leverage argument in one number.

Where people get it wrong

Reading a high figure as a good investment. Leverage raises it in both directions, and the same gearing that produces twelve percent produces the margin call.

The framework behind it Cash on cash return sets out the rule, the arithmetic and where it breaks.

Read the framework

Related terms

Loan to value Loan to value, or LTV, is the mortgage amount expressed as a percentage of the property's value, and it is the single number that determines how far a price fall has to go before the owner's equity is gone. Net rental yield Net rental yield is annual rent minus every running cost, divided by the purchase price plus every acquisition cost, which makes it the only yield figure that describes money actually reaching the owner. Debt service coverage ratio Debt service coverage ratio is net operating income divided by annual mortgage payments, and a ratio below one means the property does not earn enough to pay its own debt.

Investments Playbook publishes educational research and general information. Nothing on this site is personal investment advice, a solicitation, or a recommendation to buy or sell any asset. Property and securities can fall in value. Past performance does not predict future returns. Figures shown are indicative and may be delayed. Always take regulated professional advice before acting.