Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What type of return does the cash-on-cash return ratio represent?

1. Long-term investment yield

2. Annualized return relative to equity

3. Return on total asset investment

4. Initial return based on cash flow

The correct answer is: Initial return based on cash flow

The cash-on-cash return ratio specifically illustrates the initial return based on cash flow that an investment generates relative to the amount of cash that has been invested. This metric is calculated by dividing the annual pre-tax cash flow by the total cash invested, thereby providing a snapshot of the cash income earned on the cash invested in a property. This measure is especially useful for real estate investors looking to assess the immediate profitability and effectiveness of their cash investments, as it focuses solely on the cash generated rather than the total value of the property or the potential returns over an extended period. The cash-on-cash return allows investors to evaluate their investments based on actual income rather than projected gains, making it a critical tool in real estate investment analysis.