Cash on Cash Return

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Real estate investing requires tracking a variety of metrics, and one of the most important ones to analyze is the cash on cash return (also known as a COC return).

Investors typically use a COC return early on in the real estate investing process to determine whether they should purchase a piece of property. It’s just one metric in a long list of items, but it’s a big one so it’s a good idea to know how it works.

Keep reading to learn what a cash-on-cash return is and why real estate investors need to pay attention to it when buying and managing commercial real estate properties.

What is cash on cash return in real estate investing?

A cash on cash return—or cash yield—is a type of return rate used to assess the annual return that an investor will make on an investment property compared to the amount of mortgage and other expenses they pay over the course of the same year.

One thing to remember about the cash on cash return is that it’s not a long-term metric. It only applies for a limited time period. It’s not meant to analyze the return over the life of a loan (though it can help generate a bigger picture of an investment’s profitability).

Cash on cash return formula

Calculating the cash on cash return is not difficult and can be accomplished with a simple formula.

To calculate the cash on cash return, take the total pre-tax net profit for a given period (usually one year), and divide it by the initial amount of cash you need to invest. In other words: divide one year’s net cash flow by the initial investment.

You can use a free online cash return calculator to make this process easier.

Why calculate cash on cash return?

A cash on cash return is easy to calculate and great for viewing the potential return on residential rentals, stable income-producing investments like condos and apartments, and fix-and-flips.

Here are a few reasons to assess cash on cash return.

Assess profitability

The cash on cash return is important because it can project real estate performance during a forecasted time period.

By studying the cash on cash return, investors can determine likely distributions of actual cash in the months ahead and beyond.

Weigh financial decisions

Calculating the cash on cash return can help buyers understand whether to take out a mortgage on an investment property and whether borrowing that amount of money is worth it in the long run.

For example, a buyer may look at the cost of the mortgage compared to expenses and what they could bring in and consider making an all-cash investment to save money. Or, they might look at the cash on cash return and realize that it makes more sense to take the mortgage and invest their money elsewhere.

Estimate expenses

Conducting a cash on cash return calculation can help investors determine potential upcoming expenses. Going through this exercise can help investors avoid getting blindsided by unexpected costs.

Choose the right property

Buying property is hard. Investors who have money to spend need to assess all their options and pick the best and most profitable solution based on their available cash and the best purchase price.

Calculating the cash on cash return or the net cash flow can help outline multiple options and help folks determine whether they’re putting their money into the right investment.

Learn more:

When to analyze the cash on cash return

The cash on cash return is often used when trying to determine ROI with a rental property.

Buying rental properties often requires taking out long-term debt financing. So it’s important to separate the cash return with debt factored and measure the return from the cash you are investing apart from the standard return on investment, which factors into the total return.

Rental property cash on cash return example

Here is an example of how you would calculate the cash on cash return.

Sam has an estimated first-year annual cash flow of $5,000 on an investment property, with a total loan amount of $200,000.

In addition, Sam has the following expenses:

Down payment: $20,000
Closing costs: $6,000
Repairs: $2,500
Utilities: $500
Total cash invested: $29,000

In this case, Sam’s cash on cash return would be 10.34%.

But what does that mean and is it in line with the industry average?

Let’s take a closer look.

What is a good cash on cash return metric?

As it turns out, there is no clear-cut way of measuring a solid cash on cash return. It depends on a few different factors.

Most investors tend to agree that a return between 8% and 10% or more would be a solid investment. So going back to the above example with Sam, 10.34% wouldn’t be anything to scoff at.

Yet, a cash on cash return can be impacted by uncontrollable factors. It’s therefore important to avoid putting too much stock into it.

A beginner investor just getting started in the market may be perfectly happy with a cash on cash return of 4% to 5%. The fact is that managing real estate property can be hard, so if you’re profiting at all, it’s still a great thing.

Oftentimes investors start out around 5% and increase as they get better at managing properties and gain more experience. In these scenarios, it’s not uncommon to have a rate hovering around 4% or even lower at first and then jump to the 10% range.

What’s more, the cash on cash return is in no way indicative of a rental property’s total value. After all, it only provides a snapshot of a particular time period. So it could be negatively impacted by vacancies, taxes and insurance, heavy and unexpected repairs, and utility spikes.

Similar terms to know about

The cash on cash return is just one real estate investing metric to know. There are many more that investors need to be aware of and track in order to remain profitable and on top of finances.

Here are some additional metrics to track.

1. Net operating income (NOI)

NOI is a quick way to determine the profitability of a real estate investment after eliminating operating expenses.

Simply take your total income, including revenue generated by machines, parking, or administrative fees. Also, you’ll want to remove operating expenses. Don’t factor in mortgage payments, either.

2. Capitalization rate (cap rate)

Cap rate refers to the total amount of an investment’s value that is profit. It’s one of the most widely used methods of calculating profitability. It’s also commonly used to compare real estate investments.

To calculate the cap rate, divide the property’s net operating income by the current market value.

3. Gross rent multiplier (GRM)

When trying to determine a building’s worth, you’ll want to look at the GRM.

To get the GRM of a property, divide the price by its gross rental income. This can tell you how much has been collected in rent and related funds during a period of time.

4. Net present value (NPV)

Net present value is the difference between the present value of cash inflows and the present value of cash outflows over a certain stretch of time.

Internal rate of return (IRR)

Real estate investors need to analyze the interest on each dollar that goes into a rental property. To calculate this, you look at the IRR. This metric can help determine long-term yield.

To determine IRR, you set the NPV to zero and enter projected cash flows for each year that you hold the building.

5. Cash flow

Cash flow has to do with how much money is left over at the end of the month once all expenses are paid and rent has come through.

Learn more:

The Cashflow Quadrant

Frequently Asked Questions

Should I invest in property management?

On one hand, investing in property management will increase your expenses, resulting in a lower cash on cash return. That’s a given. Property management companies typically cost thousands of dollars annually, which you have to pay for out of pocket as an investor.

Yet, what cash on cash return doesn’t factor in is time and effort. And the fact is, most investors are not property managers. Unless you want to spend your time responding to tenants, filling vacancies, handling billing, and dealing with maintenance issues, hire a property management company. It’s typically worth every penny even if it impacts profitability.

The thing to remember, too, is that the secret to investing is scaling. Managing one property can be hard, but two or more can become impossible. Property management companies are crucial for growth-oriented investing.

Does cash on cash return include depreciation?

Cash on cash return does not factor in depreciation or appreciation. It’s simply a way of calculating the potential return on a property as opposed to its net worth.

Does the cash on cash return matter?

The cash on cash return is just one metric in a long list that you should pay attention to when buying real estate. It won’t tell you everything, but it can provide a snapshot and give you an indicator of how a property will perform for a specific time period.

Use the cash on cash return to assess whether a property is a good investment or something you should steer clear of.

The Bottom Line

Understanding concepts like cash on cash returns is critical to becoming a great real estate investor. It’s important to be able to project how an investment will fare over a given period of time before you go in and put a heavy amount of capital into a property.

Nailing a potential investment takes a lot of research as well as an ability to look ahead and predict how the market will change.

This isn’t easy at first. But the more you do it, the better your skills will become.

With the right approach and a lot of patience and determination, you could be a bona fide real estate investor before you know it. Good luck!