Net Cash Flow ÷ Invested Cash
Cash on cash return or COC return, is the amount of cash flow (rental income less mortgage, taxes, insurance, maintenance) your rental property or real estate investment generates as a percentage of the amount of capital you invested in the property, another way, a cash yield. If your rental generates $10,000 per year in free cash flow and you have invested $50,000 to buy and renovate the property (i.e. down payment plus closing costs and rehab), your cash on cash return is 20%. This is otherwise known as return on invested capital (ROIC)
Cash on cash return calculates the cash return on for a property, let's take a look at a detailed example. A real estate investor buying a commercial real estate property for a purchase price of $1,000,000 with a $200,000 down (total cash invested). At the end of every month you get $4,000 in cash flow net of operating expenses. At the end of the year you would have accumulated $4,000 × 12 = $48,000 in net cash flow. So the net operating income (NOI) on cash would be calculated as:
$40,000/$200,000 = 0.20 ~> 20%
However, since real estate investor used debt to acquire this property, a payment that must go out to the lender each month to cover the mortgage payments. There is another common metric that captures this relationship between cash flow and debt service, called the debt service coverage ratio (DSCR). Due to this the $48,000 in cash the investor received is not what he gets to keep. For the $800,000 ($1,000,000 purchase price minus $200,000 cash downpayment) they got in debt to finance this purchase, they must pay $1,500 in monthly mortgage payments.
Now to calculate the cash on cash return, we must, take the monthly $4,000 in net cash flow, subtract $1,500 in mortgage payments which includes (interest payment and principal payment), netting $2,500 in monthly income. We must take this amount for the whole year and divide it by total cash invested to get out cash on cash return
(($4,000 - $1,500) * 12) / $200,000 = 0.15 ~> 15%
15% percent is the cash on cash return in this transaction. This examples simplifies several things, specifically the tax situation of the transaction which would most likely lower the cash on cash return further. This measures the return on the cash the investor had to put into the transaction net of all possible expenses. Another good measure
It's hard to quantify what is a good cash on cash return rate. Cash on cash return rates wildly differ from location to location and might not fully capture all financial incentives to own a property. For example, some areas with lower cash on cash return might have stellar property appreciation rates, where and exit after a few years will more than make up for a lack luster cash on cash return rate. We have seen cash on cash return rate in the 7% to 11% range to be attractive to buy and hold investors that were not planning on flipping property for many years, with lower range being applicable to areas where property appreciation and demographic trends might make up for lower cash on cash return. Additionally this rate might be wildly different between single family, multi family and commercial properties so make sure to always compare apples to apples.
One more considerations is usage of debt to structure the deal. In all cash deals, the denominator of the equation will be much higher producing a worse cash on cash return, thus using debt in the deal will artificially inflate the cash on cash metric's attractiveness. This makes this metric really good for comparing between several investment options where you know you will use a certain, fixed percentage of debt, location is similar and the property type is the same, but makes it a poor metric to look at individual properties where you are not comparing it to anything similar in terms of financing structure.
This metric is based on before tax cash flows investor receive from the property thus the metric ignore taxes applicable to the investor. This may distort the attractiveness of the investment if taxes are higher in certain jurisdictions and are completely ignored by this metric.
Interestingly, the real estate investor can deduct or even defer capita cost allowance (CCA) to lower their marginal tax rate to increase the attractiveness of the property on cash on cash basis
The formula is completely numbers driven and ignores any factor that is associated with the actual property, such as its location, condition, rental market climate, local government climate, public investment direction and many other factors that are important to consider when making an investment decision.
Additional inputs are needed to accurately describe the financial position and cash returns, such as adjusted taxable income of the investor, depreciation, expenses associated with maintenance and rental of the property to gain an accurate picture on the attractiveness of the investment.
The formula completely ignores the effects of compounding interest payments. While we take out the debt payments from the cashflow we ignore any effects of compounding and this is a critical shortcoming since a property with lower nominal rate of interest compounding may be a better investment than an investment with a higher cash on cash return.
As stated above, this formula completely ignores more qualitative factors that take time to discover about the property itself such as depreciation (tax) and actual depreciation rate, the outlays you have to maintain the property in rentable condition. Additionally, no property appreciation (resale value of the property) increases or decreases are taken in to the account. While the property might be cash flowing and have a good return, an exit from the position might be impossible if the property attractiveness or market declines making it an overall a bad investment.
It is possible to have an incalculable Cash On Cash Return if you use the BRRR method highly effectively and pull all or more than the cash you originally invested out of the property by mortgage refinancing.
In conclusion, cash on cash return is a great metric to take into account when considering an investment into a rental property, but it's can't be the only criteria for evaluating an investment. Other metrics and qualitative factors regarding the property must be part of the analysis of the attractiveness of the property under evaluation.
The offer you have received is typically contingent upon the results of a home inspection. The buyer...
The amount that the Buyer will be paying to the Seller in consideration for the Seller's real proper...
An addendum is a modification or revision to the executed Purchase And Sale Agreement (the "Agreemen...
The Contract Of Sale is the agreement between the Seller and Buyer wherein real property is being so...
A Trainee Appraiser is an individual training to become a licensed real estate appraiser who has com...
The Purchase And Sale Agreement ("PSA") between a Buyer and a Seller that outlines the terms of the ...
As Disbursed is a term used by private lenders when they are only charging interest for amount of a ...
A quadplex is a 4-unit house. Quadplexes are very attractive to rental property investors. There's m...
Net Operating Income ("NOI") = Revenue - Operating Expenses. Learn how to calculate NOI....
A Personal Financial Statement is a simple overview of your Assets, Liabilities and Income that is s...
Cash On Cash Return is the amount of cash flow your rental property generates as a percentage of the...
Gross Yield = Gross Annual Rent ÷ Current Market Value. Learn more about gross rental yield. ...
A Licensed Residential Appraiser is a licensed real estate professional who has completed at least 1...
A mortgagee clause is a provision included in a property insurance policy protecting the mortgagee (...
A double closing is when a buyer purchases a property from a seller and then immediately sells the p...
A Certified Residential Appraiser has completed at least 200 hours of appraisal education and accumu...
A mortgage loan originator or MLO is a licensed person or company who facilitates the mortgage proce...
The Nationwide Multistate Licensing System or NMLS is the system of licensure for mortgage companies...
A Certified General Appraiser has completed at least 300 hours of appraisal education and accumulate...
A short sale is a sale of real property in which with proceeds will not cover the outstanding mortga...
Dutch Interest is when a private lender charges interest on the full loan amount, including the cons...
Foreclosure is the legal process in which a lender attempts to recover the balance of a loan from a ...
Real estate appraisal is the process of developing an opinion of value for real property. Appraisals...
The Inspection Window is the amount of time (defined in the Purchase And Sale Agreement) that a Buye...
The After Repair Value (ARV) is the value of a property after completion of a renovation. ...
Tax lien certificates are financial instruments that transfer tax collection from the local governme...
Scope Of Work is a document used by private lenders and appraisers to evaluate a real estate investo...
Capitalization Rate ("Cap Rate") = Net Operating Income / Current Market Value. Learn how to calcula...
Single Room Occupancy or SRO is the renting of a house room by room. Learn more about single room oc...
What are wholesale properties? Learn about wholesale real estate and how anyone buying or selling re...
Turnkey rental properties are single family and multifamily houses that are sold to rental property ...
LTARV means Loan To After Repair Value. This acronym is commonly used by private lenders and commerc...
A home warranty is either a legal warranty or service contract that covers a homeowner in the event ...
Dispositions in real estate refers to selling or liquidating a financial interest in a property. Thi...
A HUD-1 is a settlement statement used to show the debits and credits for the buyer and seller in a ...
A cash out refinance is when a real estate investor or homeowner pulls a portion of the equity out o...
What is a Private Lender? Learn about private lending and how to find private lenders for your real ...
A duplex is a 2-unit house. The means there are two separate living spaces -- two separate entrances...
An eviction moratorium is a temporary halt in evictions imposed at the Federal and/or State governme...
A cash buyer is a person or business entity that is able to purchase real estate without using a len...
In the real estate world, to rehab means to rehabilitate or renovate a house. Learn more about rehab...
Comps are a real estate valuation method using comparable properties as the basis for estimating the...
Fix and flip is a real estate term to describe the activity of buying a house, rehabbing it, and sel...
Requiring proof of funds from prospective buyers is an important qualification step and filter to pr...
A general contractor or "GC" is a licensed professional who manages and is responsible for real esta...
PropTech means property technology and is the term used to describe companies focused on technology-...
Equity in real estate is ownership in a property. Equity is the value that is left to the owner once...
PMI stands for private mortgage insurance and is charged to homeowners when less than 20% down payme...
LTV stands for loan-to-value and is a metric used by lenders to determine loan limits....
Net Yield = Net Annual Rent ÷ Current Market Value. Learn how to calculate net yield and how it's us...
FSBO means For Sale By Owner. These are real estate listings where a listing agent or realtor is not...
House hacking is the process of buying a house that you live in and rent out in order to cover part ...
PITI stands for mortgage principal, interest, taxes and insurance. Learn more about PITI at OfferMar...
A draw request is how construction loans (fix and flip, bridge) are ...
A fourplex is a 4-unit house. Fourplexes are very attractive to rental property investors. There's m...
A triplex is a 3-unit house. Triplexes are attractive to rental property investors. There's more to ...
PUD means planned unit development. A PUD is a community of single family homes where every homeowne...
Landlord insurance, commonly referred to as rental property insurance, covers dwellings from a prope...
Real estate syndication is the pooling of investment capital from multiple investors to purchase an ...
A pocket listing is a property that a real estate agent has a listing agreement for but has not synd...
HOA means Homeowners Association and it is an organization that governs a community, typically of si...
A motivated seller is an owner of real estate that needs to sell fast. Motivated sellers on OfferMar...
Free cash flow, FCF, the the cash generated by a real estate investment after all expenses are accou...
A 203k loan is a loan issued by the Federal Housing Administration (FHA) that includes purchase pric...
An assignment of contract is when the Buyer in a real estate transaction assigns their role to anoth...
Buy, Rehab, Rent, Refinance. This is a highly effective methodology for high ROI rental property in...
A real estate bird dog is someone to finds distressed properties and sellers of distressed propertie...
Deferred maintenance is any required maintenance on a property that has not yet been performed. Ther...
Off market real estate is one or more properties that are not widely marketed as being available for...
A power buyer is a company that enables cash offers for consumer home buyers....
The Multiple Listing Service or MLS is a brokerage listing syndication service....
A buyers list is a list of buyers to whom wholesalers market their deals. In traditional wholesaling...
A "REIT" is a real estate investment trust. REITs are tax-efficient financial vehicles that hold rea...
REIA stands for Real Estate Investors Association. This is a local network of real estate investors ...
Mortgage loans are repaid over time, usually in equal monthly installments, based on an amortization...
Mortgage forbearance is a program most lenders and servicers offer to homeowners to temporarily paus...
Virtual staging is gaining popularity as a low-cost alternative to expensive traditional staging. Th...
Real Estate Auctions are ways of selling and buying real estate properties. The main difference in a...
Through cash-backed offers, power buyers provide buyers the ability to make what is effectively a c...
An SFR is a single family residence. This is either a detached house or a townhome. There's more to ...
An ADU is an Accessory Dwelling Unit, which is also referred to as a "granny flat". There's more to ...
AVM stands for Automated Valuation Model, a proprietary algorithm used by iBuyers such as Offerpad, ...
ISAOA/ATIMA means "its successors and/or assigns as their interests may appear". There's more to lea...
iBuying is short for "instant buying" and is a term used in the real estate industry for fast cash o...
Debt Service Coverage Ratio ("DSCR") = NOI ÷ (Mortgage + Taxes + Insurance). Learn how to calculate ...
USPAP stands for Uniform Standards of Professional Appraisal Practice. USPAP is the ethics and perfo...
ALTA stands for the American Land Title Association. In real estate closings, the ALTA is a settleme...
A prepayment penalty is a fee charged by a lender when the loan is repaid within a designated period...
In real estate investing, CC means closing costs. There's more to learn at OfferMarket....
Direct To Seller doesn't exactly mean that it implies. Usually it's not exactly direct to seller. Th...
Full Boat is a term used by private lenders when they are charging interest for the full amount of a...
A Schedule Of Real Estate Owned, or SREO, is a list of real estate a borrower owns that is submitted...
Collateral Desktop Analysis or CDA is a 3rd party review of an appraisal often required by private l...
Hard money is a loan from a non-bank lender, typically offered to experienced real estate investors ...
Advanced draws allow fix & flip and fix & rent BRRR investors to receive funds in advance for each s...
Learn how a pledge of shares agreement is used in private lending....
MERS stands for Mortgage Electronic Registration System and tracks mortgage servicing rights and ben...
AM Best ratings assess the financial strength and size of insurance companies....
Bad Boy Carve Outs are provisions in non-recourse DSCR loans that protect the lender in the event th...
Non-Recourse in lending means there is no personal guarantee....