The Cash-on-Cash Rate of Return Up Close
After many years listing and selling rental properties as a realtor, it's my conclusion that "Cash on Cash" ranks up there as one of the more popular rates of return real estate investors ask to see when they're considering an acquisition of real estate investment property.
Not that cash on cash is a particularly powerful statistic—real estate investors would be wise to rely on other better ways to measure the profitability of an income property investment—still, because it's not without its supporters, it seemed like a good idea to take a closer look.
Cash-on-Cash (or CoC) is a measurement of the ratio between the total amount of cash flow a rental income property generates in a particular year (usually before taxes) and the total investment a real estate investor initially makes to purchase the property. In other words, it shows the yield the investor might expect to collect on his or her cash investment.
- It's easy to calculate
- It provides a quick and easy way to make "first glance" comparison between various investing opportunities.
For instance, cash-on-cash enables the investor to determine the highest cash return between several real estate investing opportunities as well as to other types of investment opportunities such as a CD.
- It's limited to the rate of return on the cash flow before taxes
- It doesn't account for the time value of money so it's most effective as a measurement in the first year of ownership only
Cash-on-Cash Return = Annual Cash Flow / Initial Cash Investment
You're conducting a real estate analysis on a rental income property and want to know what cash-on-cash return you might expect for the first full year of operation based upon a cash flow of $15,098 and initial cash investment of $130,000.
$15,098 / 130,000 = 11.61%
In Case You Want to Know
- Gross Scheduled Income
- - Vacancy and Credit Loss
- - Operating Expenses
- - Debt Service
- = Cash Flow
- Down Payment
- + Loan Points
- + Escrow and title fees
- + Appraisal and inspection costs
- = Initial Cash Investment
Although cash-on-cash is not a particularly powerful rate of return, it does have it's benefits; and given its popularity amongst real estate investors, it certainly is worth including in your real estate analysis presentations. I do.
Here's to your real estate investing success.