Passive Income

Passive income is income earned without ongoing active work, such as rent from property someone else manages. The cash flow in the numerator of cash on cash return is the passive income a rental produces, measured before income tax.

The default deal produces $9,512 a year, about $793 a month, on $150,000 invested. That figure already pays an 8% property manager, which is what makes it close to passive. Self-managing adds that fee back and lifts the return to about 9.5%, but the extra is pay for your time.

In US tax law, rental income is generally treated as passive activity income, with its own rules on when losses can offset other income. Those rules affect after-tax returns. Cash on cash is quoted before tax so deals can be compared regardless of each owner's tax position.

Further reading: Passive Income on Wikipedia.