A common method real estate investors use to calculate returns is Cash-on-Cash (CoC) return. This metric tells you the total return on the actual money you have in your real estate investment. Simply put, it’s how much money you’re earning off your cash invested. Calculating cash on cash return is particularly useful because, unlike many of the other real estate investing metrics, it includes debt service and your mortgage. To quickly calculate your cash on cash return, simply gather a bit of your property’s financials and enter it into our cash on cash return calculator below.
Cash on Cash Return Calculator:
What is Cash on Cash (CoC) Return?
Seasoned real estate investors often use the Cash-on-Cash (CoC) return metric, which compares the cash earned by a property to the cash invested. That is, it tells you how much money you get to take home per dollar you’ve put into an investment. We believe it is valuable to forecast this calculation when you’re considering a purchase, and also as a metric to track year-over-year after you own a property. Your cash is valuable and, for most people scarce, which makes CoC one of the core rental property calculators for evaluating the strength of your investments.
Cash on Cash Return Formula
The Cash on Cash Return formula is as follows:
Cash on Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
It is important to note that your annual cash flow is after debt service is deducted. Total cash invested is the acquisition price of the property plus closing costs and any capital expenditures, less the outstanding mortgage balance.
What is Cash on Cash Return in Real Estate Used For?
You can use CoC Return to analyze multiple properties to determine which one has the highest potential cash return. To put it another way, CoC measures a property’s profitability, telling how much each of the dollars invested will earn you. It factors in ALL inflows and outflows associated with operating a rental property.
This is particularly useful for a real estate investor who depends on this cash flow to cover living expenses in retirement, for example.
When you’re considering a purchase, you can compare properties and explore different scenarios. This will determine which one will give you the best rate of return on your cash, how much money to borrow, and what sorts of improvements to make.
What Information Will I Need to Calculate Cash on Cash Return?
- Annual Pre-Tax Cash Flow
- Total Cash Invested
To be able to calculate CoC, you first need to calculate the Annual Cash Flow of the property. You can get this by subtracting your annual debt service from your net operating income. Quickly calculate NOI using our Net Operating Income Calculator.
You will also need to calculate the Total Cash Invested in the property. Total Cash Invested includes all of the money put into the investment, in particular the down payment, closing costs, up-front repairs or improvements, and financing fees.
How to Calculate Cash on Cash Return?
You can calculate CoC Return by dividing the Net Cash Flow of a property by the Total Cash Invested. First, to find your Net Cash Flow, you will take all of your generated income (inflows) and subtract all of your expenses (outflows). Alternatively, enter your net operating income and monthly debt service into the cash on cash return calculator above to get your annual cash flow. Next, input the purchase price plus closing costs, your outstanding mortgage balance, and any capital expenditures spent on the property to get total cash invested. Your cash on cash return is calculated by dividing annual cash flow by your total cash invested.
Calculating Cash on Cash Return: An Example
Jerry finds a duplex for sale listed at $500,000. He intends to put a down payment of 30% ($150,000) and finance the rest. Closing costs and a few pre-rental repairs bring his total cash invested up to $165,000.
The property grosses $3,000 per month in total rental income, or $36,000 a year. Annual expenses such as property taxes, utilities, insurance, and repairs and maintenance total $10,800. Annual debt payments amount to $18,860, making his annual pre-tax cash flow $36,000 – $10,800 – $18,860 = $6,340.
Jerry enters these numbers into the cash on cash return calculator and sees the result of 3.84% ($6,340 / $165,000).
Alternatively, Jerry finds another property for sale in the same area. This one is larger, a 6-unit listed for $875,000. Though more expense, he figures he can put 20% down and limit his initial costs and keep his total cash invested to $180,000.
This property grosses $82,800 per year in rent, plus an additional $3,300 in parking and utility bill-backs. His total income therefore is $86,100 annually. Yearly expenses come to $20,500, and annual debt payments are $30,980. This property’s pre-tax cash flow is $86,100 – $20,500 – $30,980 = $34,620 per year.
The cash on cash return for this property is 19.23% ($34,620 / $180,000).
Jerry decides he can find the extra $15,000 in cash up front for the larger cash on cash return with Property B. He then moves on to looking at this property more using these additional rental property calculations.
Cash on Cash Return vs ROI: What’s the Difference?
At first glance, Cash on Cash Return and Return on Investment can seem like the same thing.
CoC gives you the cash you take home over a period of time, as a percentage of the cash you’ve invested. We believe CoC is best used when you’re holding a property long-term. Usually, run yearly, it tells you how much each of the dollars (your OWN cash!) you initially invested is earning you. Comparing this metric year-to-year lets you track the trends in your property’s performance.
We believe the best use of ROI is as a snapshot of your total gain in wealth if you sold your property, as a percentage of the cash you have put into it. It factors in appreciation, principal paid-down, and tax advantages of real estate ownership. Projecting ROI can also suggest whether it makes sense to purchase a rental if you plan to sell within a few years.
Cash on Cash Return Calculator: Takeaway
Cash on cash return is a useful and relatively simple metric, but it does not tell the full picture of a potential rental property investment. For example, it does not factor in appreciation or taxes. Before making a final investment decision on a potential property, we recommend you conduct a more thorough analysis. Start by using these other rental property calculators to guarantee the return that you are looking for.
Also Read: Cap Rate vs Cash on Cash: Two Magic Metrics for Real Estate Investors
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