Cash purchase and resulting CoC

[Carissa Holmes]

Hi All! Does purchasing a rental property (SFR) with cash always result in a lower CoC ROI than getting a bank lone (at 4% interest)? I'm in the practicing analysis phase of my growth plan and every example I've done this has been the case. I'd greatly appreciate any guidance on this as I have not been able to find a clear answer within any of my resources.

Thanks in advance!

(I’m just starting out so please feel free to communicate with me as you would a child ;)) 

[Joe Villeneuve]

Originally posted by @Todd Rasmussen:

@Carissa Holmes

Cash on cash is calculated by dividing your annual net income by the amount you have invested (income/amount invested).

As in any fraction, if you increase the denominator (amount invested) the result decreases. You should see that if you don't account for the decrease in annual income from loan payments that going from a cash to a 20% down payment increases your cash on cash by roughly 5x. So even though your loan payments reduce your income and the numerator decreases, the denominator decreasing by a factor of five boots your COC calculation.

What Todd said, except you can't use the principle reduction from the loan payments as cash income since the reduction isn't income...and it isn't in the form of cash anyway.  Besides that, the income in cash that is received from this is already distributed to you in the form of cash flow.