Cash-on-cash (COC) return measures the investment performance of an equity or real estate investment. It is also known as the cash-flow return on investment (ROI).
Cash-on-cash return measures the rate of return on an investor’s initial cash investment, which can be broken down into two components: First, cash-on-cash ROI is calculated by taking the operating income (or loss) and dividing it by the initial cash investment. This helps filter out reinvested earnings, depreciation, taxes, and other non-cash expenses. The result gives you an idea of how profitable your real estate equity or equity investment has been.
Understanding Cash-On-Cash Return
The cash-on-cash return is a metric that describes a real estate investor’s total return on investment. The calculation is based on the initial amount of money invested plus any expenses associated with the investment, minus the final amount of money earned after the mortgage has been paid off.
The COC return is a commonly used metric when analyzing rental properties. The COC return is similar to the internal rate of return (IRR), often used when analyzing other investments, such as stocks and bonds. However, one big difference is that the cash-on-cash return is based on the total amount of cash that an investment generates, while the IRR is based on the increase in the investor’s net worth.
How Do You Calculate Cash-On-Cash Return?
The cash-on-cash return is calculated by taking the total amount of cash generated by the investment property and subtracting all expenses associated with the investment, such as the mortgage cost, repairs, loan interest, taxes and insurance, or PMI. The final number is then divided by the investor’s initial investment.
For example, a real estate investor purchases a rental property for $100,000, puts $30,000 down and spends $6,000 on repairs and closing costs. After a few years, the property is sold for $150,000. The investor’s total costs are $106,000, which includes the mortgage payment for the years the property was owned, the number of repairs, the closing costs, and other associated costs. The $106,000 is then subtracted from the $150,000 selling price to get $44,000. The initial investment was $30,000, plus $6,000 in repairs, plus $100,000 in mortgage payments and closing costs, totaling $136,000. The $44,000 is then divided by the initial investment of $136,000, to get a cash-on-cash return of 0.29, or 29%.
There is no hard and fast rule for a good cash-on-cash return. It depends on the market, the location, and the type of rental property that is being purchased. The range varies widely, but a rule of thumb is between 10 and 25%; generally, the lower the rate of return on your investment, the less risk you are taking. This can be a good thing because the less risk you take, the more likely your investment will turn a profit. If, however, you need to make a large amount of money quickly, you may want to make a riskier investment with a higher cash-on-cash rate of return.
Cash-On-Cash vs. ROI
Calculating the return on investment (ROI) of a given expense is an essential business metric, used to justify spending and report on successes. A higher ROI is better because it means that more money was generated than was spent.
In real estate, ROI measures the overall rate of return on a property, including debt and cash. On the other hand, cash-on-cash return measures the return of the actual cash (equity) originally invested. COC return is often referred to as the cash-flow return on investment.
How Does Cash-On-Cash Return Compare with Other Investment Metrics?
When comparing the cash-on-cash return with other metrics such as the internal rate of return (IRR), the net present value (NPV), and the net tangible return (NTR), you first need to decide what type of investment you want to make. For example, the cash-on-cash return is the most appropriate metric if you want to invest in real estate. On the other hand, if you want to invest in stocks or bonds, the IRR is a better metric.
The NPV is a metric used when making investment decisions, such as accepting a mortgage from a bank. It compares an investment’s net present value with a different investment’s net present value. First, the net present value is calculated by taking the total amount of cash generated and subtracting the money invested. Then, the final number is divided by the amount of money invested.
The cash-on-cash return is used when analyzing rental properties. It is a metric used to determine how profitable a real estate investment will be. The cash-on-cash return is calculated by taking the total amount of cash generated by the investment and subtracting all expenses associated with the investment, such as the mortgage cost, repairs, loan interest, taxes and insurance, PMI, and other costs. The final number is then divided by the investor’s initial investment. The difference between the cash-on-cash return and the internal rate of return is that the IRR is used when analyzing other types of investments, such as stocks and bonds.
