Rate of Return

Rate of return is the gain or loss on an investment over a period, expressed as a percent of the amount invested. Cash on cash return is a single-period rate of return that counts only cash flow as the gain and only cash paid as the investment.

Rates of return differ in what they count and over what period. A total return counts income plus change in value. A time-weighted return removes the effect of when money went in and out. A money-weighted return, like IRR, includes it.

Cash on cash is deliberately narrow: one year, cash only, no appreciation, no principal paydown, no taxes. That makes it easy to compute from a listing and a loan quote, and it makes it incomplete. A rental at 6% cash on cash with 3% appreciation and $1,800 of paydown has a first-year total rate of return near 18% on the same $75,000. Know which rate of return a number is before comparing it to another.

Further reading: Rate of Return on Wikipedia.