Real Estate Investing

Real estate investing is the purchase, ownership, management and sale of property for profit through rental income, appreciation or both. Cash on cash return is the measure investors use for the income part: what the cash they put in earns each year after every expense and the mortgage.

The return on a rental has four sources: cash flow, appreciation, equity build-up from loan paydown, and tax benefits. Cash on cash captures only the first. The others are real but arrive as equity, not cash, and appreciation is a forecast until sale.

Investors use cash on cash to screen deals, to compare financing structures on the same property, and to decide whether they can hold a property through vacancies and repairs. A common target on a financed long-term rental is 8 to 12%, though at 7% mortgage rates many deals in appreciating markets return 4 to 6% in cash and rely on the other three sources for the rest. Carry cost, the negative cash flow on such a property, is the price of that bet.

Further reading: Real Estate Investing on Wikipedia.