Calculating Cash on Cash Returns for Private Investments

What Is Cash on Cash Return for Private Investments?

Defining Cash on Cash Return

Cash on cash return measures the annual return generated by an investment relative to the total capital invested. For private investments, it is calculated by taking the annual cash flow from an investment and dividing it by the total initial capital invested. This metric provides investors insight into how much of their initial capital is returned each year in the form of cash.

Why It Matters

Cash on cash return is an important metric for private investors to consider because private investments are often illiquid, meaning the initial capital is tied up for years. A high cash on cash return means more of the initial capital is returned each year, providing investors liquidity and reducing risk. This is especially important for investors with short time horizons or those looking to recycle capital into new investments.

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While simple in concept, accurately forecasting cash flows and calculating cash on cash return requires rigor and experience. Investors should exercise caution in projections, conduct thorough due diligence and work with trusted partners to make the most prudent investment choices. With the right approach, cash on cash return is a valuable quantitative tool that, combined with qualitative insights, empowers investors to deploy capital in promising opportunities.