How to Calculate Cash-on-Cash Return: The Method and Formula

Updated on May 12, 2018
jamesrk profile image

James develops software for analyzing real estate investments.

The cash-on-cash (CoC) return provides a quick and easy way for real estate investors to compare the profitability of similar real estate investment properties, or to gauge it against another (non-real estate) investment opportunity.

Okay, but with that said, it should be noted that cash-on-cash is not a particularly powerful tool for measuring the profitability of rental income property, and currently gets less attention in real estate investment analysis than it used to receive some years ago.

One shortcoming lies in the fact that cash on cash return does not take into account time value of money (i.e., the idea that a dollar today is worth more than a dollar in the future). Cash-on-cash return must be restricted to simply measuring a residential income property's first year cash flow, and not any of its future year's cash flows.

Nonetheless, cash-on-cash still offers seasoned and beginning real estate investors a valid benefit. So let's dig in.

Method

Practically speaking, the cash-on-cash return measures the ratio between a rental property's anticipated cash flow during the first year to the amount of initial cash investment made by the real estate investor to purchase the rental property. Hence, cash-on-cash is always expressed as a percentage.

Definitions

Since the property's "first year cash flow" and "initial investment" are both paramount to the CoC calculation, it seemed needful to explain each.

  • The "first-year cash flow" (or annual cash flow) is the amount of money the property is expected to generate during the first year of operation.
  • The "initial investment" (sometimes called total investment) is the total amount of cash invested including down payment, loan points, and cost of acquisition (escrow and title fees, appraisal, and inspection costs).

Calculation

The formula is:

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

To show you how to make the calculation let's consider an example.

Suppose you are interested in purchasing an apartment building with the following assumptions and want to determine what your cash-on-cash rate of return would be from the investment.

  • 6 units total
  • Acquisition costs: $5,000
  • Rent: $1,000 each monthly
  • Vacancy allowance: 5%
  • Other income: $720 annually
  • Operating expenses: $27,781 annually
  • Replacement reserves: $1,800 annually
  • Mortgage: $350,000,
  • Loan points: $3,500,
  • Annual payment: $25,181

Okay, now let's use that data to determine the "annual cash flow" and "total Investment" required to compute for the cash-on-cash rate of return.

Annual Cash Flow

  1. Gross Scheduled Income ((6 units x $1,000) x 12): = $72,000
  2. Gross Operating Income (GSI - vacancy + other income): $72,000 - 3,600 + 720 = $69,120
  3. Net Operating Income (GOI - operating expenses): $69,120 - 27,781 = $41,331
  4. Annual Cash Flow = (net operating income - replacement reserve - debt service)
  5. Result: $41,331 - 1,800 - 25,181 = $14,350

Total Investment

  1. Total Investment = (down payment + acquisition costs + loan points)
  2. Result: $150,000 + 5,000 + 3,500 = $158,500

Calculation

Annual Cash Flow / Total Investment = Cash on Cash Return

$14,350 / $158,500 = 9.05%

Now that you know this specific real estate investment yields a 9.05% cash-on-cash return, you can compare it to other similar investment real estate, or alternative investments such as a T-Bill rate, and decide whether or not to proceed with a purchase.

Sample (CoC in report)

Source: ProAPOD Real Estate Investment Software
Source: ProAPOD Real Estate Investment Software

Sample (CoC calculation)

Source: iCalculator by ProAPOD Real Estate Investment Software
Source: iCalculator by ProAPOD Real Estate Investment Software

Comments

    0 of 8192 characters used
    Post Comment

    • Property-Invest profile image

      Property-Invest 

      9 years ago from London

      Hey James!

      Great to read some decent, practical content written by a real property investor.

      Keep up the super work.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, toughnickel.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://toughnickel.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)