How to Compute a Property's Cash-on-Cash Rate of Return
The cash-on-cash rate of return is one of the more popular rates of return associated with rental property analysis. Ironically, though, it's not a particularly powerful statistic. In fact, real estate investors would be wise to rely on other better ways to measure the profitability of an income property investment.
Still, because cash-on-cash is not without its supporters, it seemed like a good idea to take a closer look for those of you new to real estate investing.
The cash-on-cash rate of return (or CoC) measures the ratio between the total amount of cash flow a rental income generates in a particular year and the total cash investment a real estate investor initially makes to purchase the property. In other words, CoC is computed because it shows the yield an 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 investors 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
- Gross Scheduled Income
- - Vacancy and Credit Loss
- - Operating Expenses
- - Debt Service
- = Annual Cash Flow
- Down Payment
- + Loan Points
- + Escrow and title fees
- + Appraisal and inspection costs
- = 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%
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. Most analysts do.
Here's to your real estate investing success.
So You Know
Both ProAPOD realeEstate investment software solutions as well as its iCalculator real estate calculator solution compute cash-on-cash rate of return.