Return on Investment (ROI)

Return on investment is the gain from an investment divided by its cost. In rental property the term usually means total return: cash flow plus appreciation plus loan paydown, divided by cash invested. Cash on cash return is ROI with a cash-only numerator, ignoring equity gains.

On the default deal, cash on cash is $4,756 on $75,000, or 6.3%. Add $1,815 of first-year principal paydown and $7,500 of appreciation at 3% and total ROI is about 18.8% on the same cash. The gap is everything cash on cash leaves out.

ROI gets complicated after a refinance. If a cash-out refinance returns most of the cash invested, the denominator shrinks toward zero and both ROI and cash on cash on the remaining cash climb toward infinity. That is a real position, not a real rate; the property still has to cover the larger loan. Use cash on cash to judge whether the property carries itself, and ROI or IRR to judge wealth built.

Further reading: Return on Investment (ROI) on Wikipedia.