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Cash-on-Cash Return

Guide to Understanding the Cash-on-Cash Return

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Cash-on-Cash Return

How to Calculate Cash-on-Cash Return

The cash-on-cash return (CoC), or “cash yield”, measures a real estate investor’s annual pre-tax earnings on a property relative to the initial amount spent to purchase the property itself.

The cash-on-cash return is calculated as the ratio between:

  1. The annual pre-tax cash income generated on the property investment
  2. The initial equity investment, i.e. the outlay of cash on the date of purchase

In practice, the cash-on-cash return calculates the annual yield received by an investor on a specific property relative to the amount paid in the corresponding year, e.g. the mortgage payments.

Calculating the cash-on-cash return involves taking the annual pre-tax cash flow and dividing it by the initial cash investment, i.e. the equity contribution.

Cash-on-Cash Return Formula

The formula for calculating the cash-on-cash return is as follows.

CoC Formula
  • Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Invested Equity

While the numerator is pre-tax, the metric is calculated post-financing, so the annual cash flow is a “levered” metric.

The CoC return is expressed as a percentage, which makes comparisons across different property investment opportunities easier.

Common examples of expenses that are factored into the cash flow metric are the following:

  • Property Taxes
  • Maintenance Fees
  • Property Upgrades
  • Renovation Fees
  • Closing Fees
  • Insurance Premiums

Cash on Cash Return vs. ROI

By now, we understand that the cash-on-cash return measures the annual pre-tax cash flow compared to the initial amount of cash invested.

In contrast, the return on investment (ROI) calculates the return across the entire holding period, whereas the cash-on-cash metric usually covers the current period, i.e. only one year.

Unlike the ROI, the cash-on-cash return can increase (or decrease) periodically due to fluctuations in rental income, expenses, and external factors.

In effect, the cash-on-cash metric can be thought of as the “cash yield” over a short time frame, while the return on investment (ROI) is a cumulative returns metric.

For instance, the cash flow metric in the CoC return calculation is only reduced by the debt service in the current period. But the return on investment (ROI) metric considers the entirety of the debt obligations related to the property investment.

Cash on Cash Return and Debt Service

The cash on cash return metric is most applicable for real estate property investments funded by debt capital. If debt financing was used as part of the transaction – which is usually the case in the commercial real estate market – the actual cash return on the investment diverges from the return on investment (ROI).

What is a Good Cash on Cash Return?

There is not necessarily a “good” cash-on-cash return that all real estate investors target, as each investor sets their own return (and risk) targets.

However, the real estate market consensus is that a forecasted cash-on-cash return between 8% to 12% is considered a worthwhile investment.

The market conditions are another factor that must be considered, as well as the type of properties (and geographical location) of the investments made.

For these reasons outlined above, it is difficult to quantify a specific, universal return to target, as it is subjective and affected by numerous variables.

Cash-on-Cash Return Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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Cash-on-Cash Return Example Calculation

Suppose a commercial real estate investor purchased a rental property with a potential gross income of $100,000. But because of vacancies and credit losses, there is a deduction of $25,000.

The effective gross income is thus $75,000.

  • Potential Gross Income = $100,000
  • Vacancy and Credit Loss = $25,000
  • Effective Gross Income = $100,000 – $25,000 = $75,000

Next, we’ll assume the operating expenses related to the property amounted to $30,000, so the net operating income (NOI) is $45,000.

We’ll now subtract the debt-related payments for the current year – i.e. the mortgage payments such as interest and principal repayment – which we’ll assume to be $20,000.

  • Mortgage Payments = $20,000

By subtracting the rental property’s mortgage payments from its net operating income (NOI), we calculate the annual pre-tax income as $25,000.

  • Annual Pre-Tax Income = $45,000 – $20,000 = $25,000

Our final assumption is the initial amount of equity invested, or $200,000.

  • Equity Invested = $200,000

After dividing our annual pre-tax cash flow by the equity invested, the return comes out to 12.5%.

  • Cash-on-Cash Return (CoC) = $25,000 ÷ $200,000 = 12.5%

Cash-on-Cash Return Calculator

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