Cash on Cash Return in Real Estate Investments

Cash on Cash Return, commonly referred to as CoC, is a key financial metric used in the real estate industry to evaluate the profitability and efficiency of an investment property. It is particularly useful in gauging the cash income earning potential of a property relative to the amount of cash investment put into it.

Understanding Cash on Cash Return

The Cash on Cash Return is calculated by dividing the annual pre-tax cash flow by the total cash invested. Essentially, it measures the return on the actual cash invested, providing a clearer picture of an investment’s performance without considering the impact of financing structure and tax factors. This metric is often expressed as a percentage.

Formula for Cash on Cash Return

The typical formula used for calculating Cash on Cash Return is:

CoC Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) * 100%

Example of Cash on Cash Return

Imagine you purchase a rental property for $100,000. You make a down payment of $20,000 and incur other initial costs totaling $5,000, bringing your total cash investment to $25,000. If your rental income for the year minus expenses amounts to $5,000, your Cash on Cash Return would be calculated as follows:

Cash on Cash Return = ($5,000 / $25,000) * 100% = 20%

This means that the cash return on your actual out-of-pocket expense (initial investment) is 20% per annum.

Importance of Cash on Cash Return

Cash on Cash Return is an important metric for real estate investors as it provides a quick snapshot of the cash flow an investment property generates in relation to the amount of cash invested. It is particularly handy for comparing the performance of different properties, or assessing whether a property meets an investor’s cash flow requirements. Investors often use this metric when making decisions about whether to buy or sell a property, depending on whether the Cash on Cash Return meets their investment criteria.

In summary, understanding and calculating the Cash on Cash Return can provide valuable insights into the profitability of real estate investments and assist investors in making informed decisions. The ability to generate attractive CoC returns is crucial in building a successful real estate portfolio.