What is a potential risk when evaluating cash-on-cash returns?

Evaluating cash-on-cash returns involves analyzing the annual cash income generated by an investment relative to the amount of cash invested. While this metric can provide valuable insights into the immediate performance of an investment, it presents several risks.

Overestimating property value trends can lead to an inflated perception of returns. If investors assume that property values will continue to increase at a historical rate without accounting for market fluctuations or economic downturns, they might expect returns that are unsustainable in the long term.

Ignoring long-term growth potential is another critical risk. Cash-on-cash returns primarily focus on short-term income generation, often at the expense of considering how the investment might appreciate in value over time. This oversight can lead investors to overlook investments that may not yield immediate high cash returns but offer significant long-term growth prospects.

Not accounting for inflation is also crucial. Cash flows generated today may lose purchasing power over time due to inflation; therefore, failing to incorporate the effects of inflation can mislead investors into thinking their cash returns are more favorable than they actually are when viewed in real terms.

Given these considerations, recognizing that all these factors play a role in accurately assessing the risks associated with cash-on-cash returns is essential. Each aspect—property value trends, long-term growth