What does a property’s cash-on-cash return measure?

A property’s cash-on-cash return is a financial metric that calculates the annual pre-tax cash flow generated by an investment property relative to the total cash invested in it. This measurement is critical for investors as it provides insight into the property's profitability and efficiency in generating cash income concerning the capital invested.

When calculating cash-on-cash return, the formula used is:

Cash-on-Cash Return = (Annual Pre-tax Cash Flow) / (Total Cash Invested)

This allows investors to evaluate how well their cash investment is performing on an annual basis. For example, if an investor puts down $100,000 on a property and generates $10,000 in cash flow each year, the cash-on-cash return would be 10%. This metric is particularly useful for comparing different investment opportunities and helps investors make informed decisions regarding their real estate investments.

The other options do not accurately define cash-on-cash return. The total profit from selling a property considers capital gains but doesn’t measure the operational cash flow relative to the initial investment. The amount of rent collected reflects income but doesn’t account for expenses or the investment amount. Lastly, the market price of similar properties is related to valuation and market conditions, not the performance of a specific cash investment.