Cash on Cash (COC) is the ratio, expressed as a percentage, of cash flow before taxes to the investor's down payment (initial investment).  Mathematically, this measure of investment can be expressed as follows:  COC = cash flow before taxes/downpayment.  A property with a before-tax cash flow of $50,000 where the investor put $300,000 down would have a Cash on Cash of:  $50,000/$300,000 = 25% cash on cash.

Cash on Cash is most often used to determine the required down payment for a property with a known first year cash flow before tax and given an investor's cash on cash requirement.  In the above example, if the investor has a 15% cash on cash goal, the down payment for the property can be calculated as follows:

Downpayment = cash flow before taxes/cash on cash goal

Downpayment = $50,000/0.15 = $333,333

Cash on Cash is one step closer than Cap Rate to being a measure of return on investment because it accounts for the effects of financing (as well as the property's expenses, vacancy, and credit losses).  However, it falls short because it does not consider the tax effects, and it is limited to a one-year income forecast.