What does the cash-on-cash formula calculate?

The cash-on-cash formula calculates the cash returned to the investor (or sponsor) as a ratio of the initial equity invested. This metric is particularly useful in real estate and private equity, as it allows investors to evaluate the cash flow generated by their investment relative to the amount of capital they initially put in. By expressing the return in this way, investors can gain insight into the effectiveness of their investments and how quickly they can expect to see a return on their capital.

Using this formula, investors can make informed comparisons between different investment opportunities by assessing each one’s cash-on-cash return. This focus on actual cash inflows is crucial, especially in situations where non-cash factors like depreciation might affect overall profitability but don't provide liquid returns in the short term.