Cash-on-cash yield calculates investment returns without a secondary market. It divides annual dollar income by total dollar investment to determine the percentage return, which can be tracked quarterly or monthly. High returns indicate holding the investment, while low returns suggest selling and investing elsewhere.
Cash-on-cash yield is a strategy for determining the rate of return on a given investment. In general, the calculation of a cash-on-cash return is used when there is no secondary market involved with 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 for the total dollar investment.
To understand how cash back in cash works, it helps to understand what a secondary market is and why this type of calculation will not work in such an environment. A secondary market is a situation in which an investor buys a security directly from another investor, instead of buying the security from the issuer. This added dimension to the transaction can add a layer of risk that cannot be easily accounted for in the usual process for determining cash-on-cash yield, due to the presence of a third party in the financial transaction.
Calculating the actual return on investment with the cash back approach is very simple. Essentially, the cash-on-cash yield will divide the annual dollar income by the total dollar investment. The result will be a percentage that will reflect the annual return achieved by the initial investment in the asset. This can also be drilled down to quarterly and monthly percentages with a bit more calculation, if the investor wants to track how much return is being made on shorter time frames.
Ideally, determining the cash-on-cash yield will result in a relatively high percentage annual return. When this is the 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 generate a lower cash-for-cash return over two periods may indicate that the investor would do well to sell the asset and invest elsewhere.
Smart Asset.
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