Cash-on-cash yield is a simple way to calculate the return on investment for an investment without a secondary market. It divides the annual dollar income by the total dollar investment to determine the percentage return. This method may not work for investments with a third party involved. A high percentage return may indicate a good investment to hold onto, while a lower return may suggest selling and investing elsewhere.
Cash-on-cash yield is a strategy for determining the rate of return on a particular investment. Generally, the calculation for a cash-on-cash return is used when there is no secondary market involved in the investment. This approach can be a great way to project the rate of return on a monthly or quarterly basis, or to calculate the annual dollar income that could be generated on the total dollar investment.
To understand how cash yield works, it helps to understand what a secondary market is and why this type of calculation won’t work in that environment. A secondary market is a situation where an investor buys a security directly from another investor, rather than buying the security from the issuer. This additional dimension to the transaction can add a level of risk that cannot easily be accounted for in the usual cash-on-cash yield determination process, due to the presence of a third party in the financial transaction.
Calculating the actual return on investment with the cash-on-cash return approach is very simple. In essence, the cash-on-cash yield will divide the annual dollar income by the total dollar investment. The result will be a percentage amount that will reflect the annual return on the initial investment in the business. This can also be broken down to quarterly and monthly percentages with a little more computation if the investor wishes to monitor the amount of return realized in a shorter time frame.
Ideally, the cash-on-cash yield determination will result in a relatively high percentage of the annual return. In this case, the investor is likely to choose to hold the investment for an extended period of time. At the same time, an investment that tends to produce a lower cash flow yield over two periods may indicate that the investor would do well to sell the business and invest in another opportunity.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
