Method of ROI calculation for notes

[Joshua Andrews]

I've seen several types of calculations used to determine return on a note. One is the cash on cash method, and the other most frequently used is the IRR.

I am familiar with how to calculate both on typical rental property scenarios. However a little confused with the cash on cash calculation with regards to note income.

Obviously a note is a loan or mortgage, and as such has an amortization schedule. Because part of the payment is interest and part is a return on principal, are we counting both in the cash on cash calculation?

I am under the impression that a cash on cash calculation is only based on the "profit" or in this case the interest portion of the payment.

Is this correct? If not, why and which method of calculating return do you prefer as note investors?

Interested to hear your opinions!

Josh