Cash on Cash Return

‍Cash on Cash Return (CoC) is a widely used metric in real estate that helps investors evaluate the performance of their investment. Also known as cash yield, this metric specifically measures the annual return an investor earns on the actual cash invested in a property, before taxes. It provides a straightforward way to assess the profitability of an investment relative to the amount of cash put into it.

Understanding Cash on Cash Return

Cash on Cash Return is calculated by taking the total annual cash flow before tax and dividing it by the total amount of cash invested in the property. This metric gives investors a percentage that represents their return on the cash they have invested in the property, allowing them to quickly gauge how well the investment is performing.

The formula for Cash on Cash Return is:

Cash on Cash Return = Annual Cash Flow Before Tax / Total Cash Invested

Where:

• Annual Cash Flow Before Tax: This includes all income generated from the property, such as rent, before accounting for taxes.
• Total Cash Invested: This refers to the total amount of cash the investor has put into the property, including down payments, closing costs, and any other upfront expenses.

Learn What's The Difference? Cash on Cash Return vs ROI

Example of Cash on Cash Return Calculation

Let’s consider an example to illustrate how Cash on Cash Return is calculated:

Imagine you purchase a property for $200,000, and your total cash investment, including the down payment and closing costs, amounts to $50,000. If the property generates an annual cash flow before tax of $30,000, the Cash on Cash Return would be:

Cash on Cash Return = $30,000 (Annual Cash Flow) / $50,000 (Total Cash Invested) = 0.60 or 60%

This means you would earn a 60% return on the cash you invested in the property each year before taxes.

Why Is Cash on Cash Return Important?

Cash on Cash Return is an important metric for several reasons:

• Investment Comparison: CoC allows investors to compare the performance of different real estate investments. By expressing the return as a percentage, it becomes easier to see which property is generating a higher return on the cash invested.
• Simplicity: The calculation of Cash on Cash Return is relatively simple and doesn’t require complex forecasting or financial modeling. This makes it accessible for investors who want a quick snapshot of their investment’s performance.
• Focus on Cash Flow: CoC emphasizes cash flow, which is crucial for real estate investors who rely on rental income to cover expenses, pay down debt, and generate profits.

Limitations of Cash on Cash Return

While Cash on Cash Return is a valuable metric, it’s important to be aware of its limitations:

• Ignores Long-Term Gains: CoC only accounts for the annual cash flow relative to the initial cash investment and doesn’t consider potential long-term gains from property appreciation or equity build-up through mortgage payments.
• Excludes Taxes and Future Expenses: The metric doesn’t account for taxes, future economic changes, or unexpected expenses, which can significantly impact the overall return on investment. For example, a sudden market downturn or an unforeseen major repair can alter the cash flow and, consequently, the CoC return.
• Static Viewpoint: CoC provides a snapshot of the return based on current cash flow but doesn’t factor in how that cash flow might change over time. For instance, improvements in neighborhood infrastructure or the addition of a new school might increase property desirability and rent, potentially boosting future cash flows.

Conclusion

Cash on Cash Return is a practical metric that provides real estate investors with a clear understanding of their investment’s performance relative to the cash they’ve invested. By calculating the annual return on their cash investment, investors can make informed decisions about whether a property is meeting their financial goals. However, it’s important to use this metric alongside other tools and considerations, as it doesn’t capture the full picture of an investment’s potential, particularly over the long term.

Learn What's The Difference? Cash-on-Cash Return vs Cap Rate