Payback Period

The payback period is the time an investment takes to return its initial cost from the cash it generates. For a rental it is cash invested divided by annual cash flow, which makes it the reciprocal of cash on cash return.

A 6.3% cash on cash return means a payback of about 15.8 years: $150,000 divided by $9,512. At 10% it is ten years, and at 12.5% it is eight. Investors who think in "how long until I get my money back" are asking the cash on cash question in years instead of percent.

Payback shares the same blind spots. It ignores appreciation, loan paydown and the sale, and it treats a dollar in year fifteen as worth the same as a dollar today. A refinance that returns capital early can shorten it sharply without the property earning any more.

Further reading: Payback Period on Wikipedia.