Lets talk Cash on Cash Return

[Madison Carlson]

The Cash on Cash (CoC) return is the rate of return used in real estate to calculate the cash income earned on the invested equity in a property. Cash on cash return = net operating income/total cash investment. This measures the annualized return. Cash on Cash return is one of many important metrics used in the Investment Analysis process.

Let's dive into the different type of investor portfolios and how your financing strategy can affect the CoC. Those with low to no debt generally have a lower CoC. The challenge for investors with significant capital/equity in smaller income-properties is that though positive cash flow is being generated, the CASH-ON-CASH return (%) on invested capital is typically low single digits. And, depending on the effective tax rate of the investor, the after-tax return on cash flow is almost always to some degree even lower.

The simple fact is that larger multi-family properties (apartment buildings), mixed-use properties and retail buildings sell/trade at capitalization rates that offer investors’ greater yield assuming sufficient capital is available for investment. With smaller income-properties, investors usually must make a strategic choice whether cash-flow OR growth of capital/equity is the primary goal, it is just not arithmetically probable to maximize both at the same time.

You may ask yourself how you can optimize these metrics depending on the investor’s portfolio. This leads into the purpose of Realty Yield’s Investment Property Analysis (IPA). The purpose of our IPA is first to analyze and summarize the performance of your current real estate holding-s from a return on invested capital/equity standpoint. Based upon the analysis and your strategy we will evaluate options to see where we can achieve higher returns, or growth of capital/equity.