The 45-year-old has been handed a three-year contract with the province, traditionally Australia's strongest and wealthiest, which last season crashed to a record eight successive losses and ended up 11th in the 15-team competition.
Waratahs players, however, formed the core of the Australia team that beat Six Nations champions Wales 3-0 in a Test series earlier this year and it was that talent that drew Cheika home to Sydney.
"I liked the potential of creating something at the Waratahs for longer than the few years we've got now," he said.
"Not all clubs have that potential. This is a team and an organisation with really great potential and I'd really like to tap into that."
Cheika replaces Michael Foley, who quit the job in July after just one season in charge to take up a three-year deal with the Western Force - a job Cheika turned down.
Chairman Roger Davis said the Waratahs had interviewed "more than a dozen" candidates for the job and had brought Cheika in as a "change agent" to transform the club and put it back at the top of Super Rugby.
"I don't know if I'm an agent but I definitely like the challenge of being able to change something for the better, not just changing things for the sake of it," Cheika said.
Waratahs coaches are expected not only to produce winning teams but also ones that win in style, a double demand that cost Queensland Reds coach Ewen McKenzie the job after taking the Waratahs to the Super Rugby final in 2008.
Cheika said he was comfortable with the challenge.
"That's pretty easy because I have the same expectations myself," he added.
"I don't feel that that's an extra pressure because that's what I want to do.
"I come from an attacking background, sometimes to my own detriment ... I don't think you can win big games without scoring tries."
A number eight who represented New South Wales in his playing days, Cheika cut his coaching teeth with Sydney club Randwick before moving to Ireland with Leinster in 2005.
Cheika took the Irish province to the Heineken Cup semi-finals in his first season before, with last year's Waratahs skipper Rocky Elsom on board, capturing Europe's top club prize three years later.
Two seasons at Stade Francais in France's Top 14 followed but he was unable to replicate the continental success he enjoyed at Leinster with the once formidable Paris club and departed in May.