Accounting Rate of Return (ARR)

Accounting rate of return is average annual accounting profit divided by the initial investment. It looks like cash on cash return but uses a different numerator: profit after depreciation instead of cash after debt service.

On the default deal the gap is wide. NOI of $40,210, minus $27,068 of first-year interest and about $14,545 of depreciation on a $400,000 building value, leaves an accounting loss of roughly $1,400. The same property produces $9,512 of cash flow and a 6.3% cash on cash return.

Neither figure is wrong; they answer different questions. Accounting profit drives taxes and financial statements. Cash on cash shows what you can actually spend. The difference is why a rental can show a paper loss on a tax return while depositing money every month.

Further reading: Accounting Rate of Return (ARR) on Wikipedia.