What is Cash on Cash

Cash-on-Cash (or CoC) is a way to measure the ratio between the total amount of cash flow a rental income property generates in a particular year (usually before taxes) and the total investment a real estate investor initially makes to purchase the property. In other words, it shows the yield the investor might expect to collect on their investment.

Pros

Easy to calculate

Provides a quick and easy way to make "first glance" comparison between various investing opportunities.

Example, CoC enables the investor to determine the highest cash return between several real estate investing opportunities as well as to other types of investment opportunities such as a CD.

Cons

Limited to the rate of return on the cash flow before taxes

Does not account for the time value of money so it's most effective as a measurement in the first year of ownership only.

The formula to figure is

Cash-on-Cash Return = Annual Cash Flow / Initial Cash Investment

Example

You're conducting a real estate analysis on a rental income property and want to know what cash-on-cash return you might expect for the first full year of operation based upon a cash flow of $15,098 and initial cash investment of $130,000.

$15,098 / 130,000 = 11.61%

What to consider to calculate your CoC

oGross Scheduled Income

o- Vacancy and Credit Loss

o- Operating Expenses

o- Debt Service

o= Cash Flow

oDown Payment

o+ Loan Points

o+ Escrow and title fees

o+ Appraisal and inspection costs

o= Initial Cash Investment