An investor puts $80,000 cash into a deal and receives $8,000 in annual pre-tax cash flow. The cash-on-cash return is 10 percent. The metric measures the annual cash income relative to the actual cash invested, ignoring appreciation and loan paydown.

It is especially useful for comparing leveraged investments. Two properties with identical cap rates can produce very different cash-on-cash returns depending on financing terms. Higher leverage can boost the percentage when the property performs well, yet it also magnifies losses if cash flow turns negative.

Investors use cash-on-cash return alongside other measures such as internal rate of return and equity multiple. It does not capture the full picture of profitability, but it answers a practical question: how hard is my cash working right now?

In a world of complex projections, cash-on-cash return stays refreshingly direct.