How to Compute Your Cash-on-Cash Rate of Return on Rental Income Property
The cash-on-cash rate of return (CoC) is one of the more popular rates of return associated with any real estate investment analysis. However, 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 rental income property investment.
Still, cash-on-cash is not without its supporters, so it seemed like a good idea to take a closer look for those of you new to real estate investing.
What is Cash-on-Cash?
Cash on cash is a rate of return that 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, and is computed because it shows the yield a real estate investor might expect to collect on his or her cash investment.
Of course, not unlike any measurement investors use to determine profitability, CoC has both pros and cons. Here are the most prevalent.
- 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
- 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 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.
$9,560 ÷ 100,000 =
Cash-on-Cash: 9.56% (see illustration below)
Rule of Thumb
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 as most analysts do.
So You Know
Cash on Cash Return is included in these ProAPOD solutions: