How delayed capital expenses affect Cash-on-Cash

[Bruno Tavares]

For all the math geeks out there, here's a question on how to handle Capex in your Cash-on-Cash calculation.

• Bought a property for $150,000 already rented
• After 12 months I did a $6,000 renovation I knew going in I had to do. 

I could have done that from the get-go and bundle all up as my initial cash invested, but I waited 12 months and did the renovations later.

Now I'm trying to figure out the right math, and it gives me completely different results:

1. Consider the $6k renovations as an expense:

• Total Cash Invested: $35,000
• Net Annual Income: $4,000 cashflows - $6,000 renovations = -$2,000
• Cash-on-Cash Return = Net Annual Income / Total Cash Invested = -5.7%

2. Consider the $6k as part of the initial investment, even though it happened 12 months later:

• Total Cash Invested: $35,000 + $6,000 renovations = $41,000
• Net Annual Income: $4,000 cashflows
• Cash-on-Cash Return = +9.7%

In one scenario I end with -5.7% and the other +9.7%, just by the way I move that $6k expense. 

I don't want to play the numbers and make a fool of myself, so I was wondering how you guys would handle this :)

[Kenneth Reimer]

@Bruno Tavares Hi Bruno, awesome question. I think the answer depends on who you're presenting the information to? Also, depending on the type of expenditure, you might want to prorate the expense to both capex and operating expenses. 

The utility of the COC metric is to understand how strong the deal is (given how much cash it takes to get into it) when it's running on "cruise control." Obviously no property is truly that easy, but explaining COC when you're doing renovations is irrelevant. COC is a great metric for understanding how hard your money is working for you in the deal, and in turn using to decide whether or not to pull the trigger on closing or not.

To answer your question, I think the best way to handle this situation is to take the capex out of the equation and explain to whoever your presenting this to that the capex is what it takes/took to get the deal going in order to achieve the COC levels that you are projecting/experiencing.

I hope this helps you Bruno!

Kenny Reimer