R.O.I and Cash on Cash return

[Pedro Rodriguez]

are they the same?? is there any difference? 

[Llewelyn A.]

@Pedro Rodriguez

Here is a couple of scenarios that I like to use to explain the difference between ROI and Cash on Cash Return.

FIRST, both are Returns. HOWEVER, they are calculated differently and therefore, will get a different answer.

Here is Scenario 1:

You buy an Investment for $120k Cash. It pays you $1k per Month or $12,000 per year.

Because you collected $12k the first year, your Cash on Cash Return (CCR) is $12k / $120k = 10% CCR.

Here is Scenario 2:

You buy an Investment for $120k Cash. It pays you $1k per month or $12k per year. HOWEVER, because you need to sell it in the beginning of year 2, you wind up selling the property for the same $120k. BUT, it cost you $6k in Closing Costs and $6k in Commissions for a total of $12k in closing expenses.

Your Overall RETURN is calculated as follows:

Investment: $120k

Cash Flow: $12k

Closing Costs + Commission: $12k

Profit: ZERO

ROI?! ZERO

I have been investing for 21 years. I don't use CCR... EVER. I use more comprehensive calculations that give me a total cost as well as total profits.

I anticipate ALL profits and Expenses over a 10 year holding period and then I pretend to sell the Investment. We call this a pro forma business plan.

CCR is used often but I don't consider it to be an actual return.

CCR to me is just a calculation of the 1st year Cash Flow from the money you invested. But that's it. Doesn't tell me anything about how much is my return until I calculate the actual closing costs on the sale of the property.

Makes sense?