Cash on Cash Return (CoC)

Introduction

Cash on Cash Return is a pivotal metric in the realm of real estate investing, offering investors a clear view of the profitability and cash flow generated from their property investments relative to the amount of cash invested. This metric is particularly valuable for assessing the performance of income-generating properties, such as rental units.

What is Cash on Cash Return?

Cash on Cash Return measures the annual return the investor makes on the property in relation to the amount of cash invested. This return is expressed as a percentage, providing a straightforward metric to gauge the efficiency of an investment's cash flow.

The formula to calculate Cash on Cash Return is relatively simple and focuses on the actual cash income earned versus the cash invested. Here it is laid out:

Cash on Cash Return=(Annual Pre-Tax Cash FlowTotal Cash Invested)×100\text{Cash on Cash Return} = \left( \frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Cash Invested}} \right) \times 100
  • Annual Pre-Tax Cash Flow: This is the net income the property generates over a year, after all expenses have been paid, but before taxes.
  • Total Cash Invested: This encompasses all cash outflows related to the investment, including down payment, closing costs, renovation expenses, and any other cash expenditures to make the property rentable.

Importance of Cash on Cash Return

Understanding Cash on Cash Return is crucial for several reasons:

  • Investment Performance: It provides a clear indicator of the investment’s cash flow performance, offering insights into the efficiency of your cash investment.
  • Comparative Analysis: Investors can use this metric to compare the cash flow efficiency of different properties or investment opportunities.
  • Investment Decision Making: By evaluating the cash returns, investors can make informed decisions that align with their financial strategies and goals, especially when looking for immediate cash flow.

Practical Application

Consider an investment property where the total cash invested is 100,000,includingdownpayment,renovation,andclosingcosts.Iftheannualpre−taxcashflowfromthepropertyis100,000, including down payment, renovation, and closing costs. If the annual pre-tax cash flow from the property is 10,000, the Cash on Cash Return would be:

Cash on Cash Return=(10,000100,000)×100=10%\text{Cash on Cash Return} = \left( \frac{10,000}{100,000} \right) \times 100 = 10\%

This means that for every dollar invested in the property, the investor earns 10 cents back in the form of cash flow, before taxes, each year.

Conclusion

Cash on Cash Return is an essential metric for real estate investors, particularly those focused on income-generating properties. It allows for an effective assessment of the cash flow an investment generates relative to the amount of cash invested, offering a tangible measure of investment performance and efficiency. By understanding and applying this metric, investors can strategically select properties that align with their cash flow objectives and overall investment strategy, paving the way for financial success in real estate investing.

Table of Contents