REHAB-Does Cash on Cash Return apply in this situation as a metric

[Mario Morales]

I am planning on rehabbing a unit in a 3 unit building. The other 2 are done. Just to throw some numbers out there, If it costs about 45K to rehab and rental income should be about $24000 a year. Is this a CoC metric or is it something else?

[Paul De Luca]

@Mario Morales

Cash-on-cash return measures the amount of cash flow relative to the amount of cash invested in a property investment and is calculated on a pre-tax basis.

In theory if your rental income increases by X amount annually due to the rehab while holding your expenses constant so it directly increases your bottom line (cash flow), you can calculate the CoC return by inputting X/$45k (the cost).

[Carini Rochester]

CoC is a metric I see used when a project is being financed, so that the cash an investor has in is, say, 20% (the down payment) of the value of the asset. This is what gives you a relatively high (hopefully) CoC return. The difference with a rehab is that it probably isn't financed, so you have 100% being invested instead of 20%. Hopefully your 45k increased the value more than 45k, but almost certainly you didn't 5x it like you would have gotten if you had used the 45k as a down payment on another property. To make the CoC look much better, the thing to do now is cash out refinance. If your 45k increased the value of the property 70k, and during the time you've owned the property the property value went up, you might refinance 50 or 60k out. In that scenario, the rehab would cost you Zero cash and the rent went up, giving you an infinite CoC return (on the rehab work. Probably not infinite on the property as a whole.)

[Ko Kashiwagi]

BiggerPockets and dealcheck.io has a calculator for this!