What is Cash-on-Cash Return?
Cash-on-Cash Return (CoC) is a metric used to assess the cash yield on the cash invested in a real estate deal. It focuses exclusively on the cash flows received relative to the amount of cash invested, providing an uncomplicated way to evaluate initial income received from properties.
Key Features:
- Focus on Cash Investment: This measure looks purely at the return relative to the money invested in the property, excluding any financing considerations.
- Annualized Measure: Typically expressed on an annual basis, allowing investors to normalize returns over different time periods or investments.
- Simple Calculation: Often used for calculating the performance in the initial years of ownership.
Formula:
\[ \text{Cash-on-Cash Return} = \frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Cash Invested}} \]
Examples:
Example 1: An investor bought a rental property for $200,000 with a down payment of $50,000. In the first year, the property generated $10,000 in net operating income (NOI) after all expenses. \[ \text{Cash-on-Cash Return} = \frac{$10,000}{$50,000} = 0.20 \text{ or } 20% \]
Example 2: A commercial building was acquired with a $400,000 down payment. In the first year, it produced an NOI of $35,000. \[ \text{Cash-on-Cash Return} = \frac{$35,000}{$400,000} = 0.0875 \text{ or } 8.75% \]
Frequently Asked Questions
1. What is the difference between Cash-on-Cash Return and ROI?
Cash-on-Cash Return focuses solely on the return over the cash initially invested on an annual basis, whereas ROI (Return on Investment) can account for total profits, including capital gains and losses over the entire investment period relative to the entire investment cost.
2. Can Cash-on-Cash Return indicate the overall profitability of an investment?
While it gives insight into the initial yearly return on the cash invested, it doesn’t account for all variables such as long-term appreciation, taxes, or refinancing; hence, additional measures should be considered for overall profitability.
3. Is financing considered in Cash-on-Cash Return?
No, financing is not factored into the formula – it only accounts for the cash initially invested.
4. Why do investors use Cash-on-Cash Return?
Investors use it for its simplicity and to understand the annual income-producing ability of a property relative to the cash invested.
5. How does leverage affect Cash-on-Cash Return?
Well-structured leverage can significantly enhance Cash-on-Cash Returns by increasing annual cash flows relative to the actual cash outlaid for investment.
Related Terms
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Net Operating Income (NOI): The income generated after deducting operating expenses but before deducting taxes and financing costs.
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Return on Investment (ROI): Measures the gain or loss generated on an investment relative to its cost over the entire investment period.
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Internal Rate of Return (IRR): The discount rate that makes the net present value (NPV) of all cash flows (positive and negative) from an investment equal to zero.
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Capitalization Rate: A measure used to evaluate the profitability of a real estate investment, calculated by dividing net operating income by the current market value of the property.
Online Resources
- Investopedia: Cash-on-Cash Return
- BiggerPockets: Understanding Cash on Cash Return in Real Estate
- The Balance: How to Calculate and Use Cash-on-Cash Return
References
- Financial analysis frameworks and investment performance metrics descriptions available on Investopedia and finance textbooks.
- Web-based calculators and academic articles on real estate investment analysis.
Suggested Books for Further Studies
- “Real Estate Investing: Market Analysis, Valuation Techniques, and Risk Management” by David M. Geltner and Norman G. Miller
- “The Book on Rental Property Investing” by Brandon Turner
- “Commercial Real Estate Analysis and Investments” by David M. Geltner and Jeffrey D. Fisher
