What is Cash on Cash Return in real estate investing?
The cash on cash return is one of the most common metrics used for calculating the rate of return on an investment property when investing in real estate.
But what exactly is the CoC return, and how do you calculate it?
Cash on Cash Return
The cash on cash return is a metric that measures the rate of return of an investment property based on the amount of cash that you paid for it.
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This means that the CoC return does not take into consideration the amount of money that you borrow through a mortgage or a loan, but will only calculate the rate of return based on the amount of cash that a real estate investor has paid out of his/her own pockets.
The CoC return can help real estate investors understand exactly what they are getting for their money, and it can help them avoid unnecessary risks and plan the future of their investment and finances.
How is the Cash on Cash Return Calculated?
The cash on cash return has a very simple and easy-to-use formula for calculating it:
CoC Return = (Before-Tax Cash Flow / Cash Invested) X 100
Basically, the before-tax cash flow is the amount of profit that you are making from the investment property. In the case of a rental property, for example, the cash flow is the amount of monthly rent minus the monthly expenses.
The cash invested is, well, the cash that the investor has paid out of his/her own pockets.
You multiply the value by 100 because the cash on cash return is a percentage-based value.
To give you an example, let’s suppose that you’re purchasing an investment property that you want to rent out for $2,400/month. The monthly expenses of this rental property amount to $1,600. The price of the property is $200,000, and you’re using an 80% mortgage to finance the purchase.
The annual cash flow of this property would be $9,600 (annual cash flow – annual expenses).
The cash invested in this property would be $40,000.
Now let’s do the math:
CoC Return = ($9,600 / $40,000) X 100
CoC Return = 24%
So, what does it mean?
This means that your rental property will be generating a profit that is equal to 24% of the amount of cash that you have invested in it each year.
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It should be noted, however, that this was a very simplified example. In reality, there are several aspects that should be included in your calculations, such as the mortgage payments and interest rate, and the end result will probably be lower than 24%
A good cash on cash return, although it depends on several factors, should be anywhere above 5%, with the average CoC return being somewhere between 8-15%.
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