Cash on Cash Return with Equity
(also known as Return on Equity (ROE))
Cash-on-Cash Return with Equity is essentially a Return on Equity calculation. Since two of the draw backs of the traditional Cash-on-Cash Return are that property appreciation and principal debt payments are not factored into the formula, Cash-on-Cash Return with Equity adds these two components to the traditional Cash-on-Cash Return calculation.
Think of it this way: Cash-on-Cash Return with Equity treats the net increase in equity from the property for a particular year as “cash” received even though it really is just a paper profit.
A property’s net equity increase is calculated by determining what the “Sale Proceeds after Taxes” would be at the beginning of a year, and then again at the end of the year. The difference between the two numbers should be that year’s net appreciation and principal debt payments less sales expenses and income taxes.
The numerator of the formula not only captures the true net rental cash flow for a particular year, but also adds that year's net equity increase (net appreciation and principal payment or debt pay down). The denominator of the formula is the initial investment (down payment) plus and any previous year’s net equity increases.
EXAMPLE:
Determine Year 2’s Cash-on-Cash Return with Equity Assumptions: Initial Investment or Down Payment : $562,250
Year 2 Rental Cash Flow: $34,309
End of Year 1 Sales Proceeds $614,397 (assuming the property is sold end of Year 1)
End of Year 2 Sales Proceeds $661726 (assuming the property is sold end of Year 2) Thus, Year 2 Net Equity Increase (or equity change) is $47,329 The Numerator: $34,309 + $47,329 = $81,638 The Denominator: $562,250 Down Payment + 52,147 (Year 1’s Equity Increase) = $614,397 Thus, $81,638 / $614,397 = 13.29% Cash on Cash Return with Equity Conclusion: We have $614,397 in net equity at the end of Year 1. In other words, we could walk away with $614,397 in our pockets at the end of Year 1. But, should we? Should we keep the $614,397 in the property or reinvest it in another property or alternative investment?
By keeping the property for one more year, you will make 13.29% on your equity. Now that you know the return, you can then make an informed decision as to whether you should hold or sell.
Cash on Cash with Equity Sample Report
Note: Notice that the End of Year 1’s Sales Proceeds of $614,397 is equal to our denominator. The denominator is the equity we have in the property. When calculating Year 3's return, the denominator will be $661,726 ($562,250 + $52,147 + $47,329) | 
