How to Calculate a Cash on Cash Return
While the cash-on-cash return (CoC) is one of the more popular rates of return associated with rental investment property analysis, at the same time, it is not a particularly powerful tool.
In this article we will discuss this return, including it's definition, it's pros and cons, and it's formula. We also include an example along with an illustration of the calculation.
About Cash-on-Cash Return
What is it?
The cash on cash return is the ratio of the total amount of cash flow a rental property generates in a year (typically during the first year of ownership) to the total cash investment a real estate investor initially makes to purchase the property
You purchased a duplex with an initial cash investment of $100,000 and are projecting an annual gross rental income of $50,000, 4% vacancy, 28% operating expenses, and a debt service of $25,000. You want to know the yield you might expect to collect on your cash investment into the property.
= Cash-on-Cash Return
- 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
$9,560 ÷ 100,000 =
Cash-on-Cash: 9.56% (see illustration below)
What are the Pros?
- 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.
What are the Cons?
- 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
Rule of Thumb
It cannot be denied that cash-on-cash is not without its supporters. So it is a good idea for you who are new to real estate investing to understand it enough to include in your property presentations. Just don't rely upon it exclusively when making rental investment decisions.
So You Know
Cash on Cash Return (CoC) is included in all three ProAPOD solutions: