What Is Cash On Cash Return: Definition, Formula, & Examples

Justin and Sarah Pilotte May 02, 2024

4 People Read

Intro

As real estate investors, we know how crucial it is to get your numbers right. In this article, we will go over another calculation that can help you nail down your numbers and give you confidence in your next investment.

Let's dive right in!

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Key Takeaways

In This article we will go over the following:

What is Cash On Cash Return
Cash on Cash Return Formula
Cash On Cash Examples
Cash On Cash Vs Cap Rate
Cash On Cash Return Excel Template
Some Cash on Cash Return Calculators
Some FAQ's

Letters saying Cash

What Is Cash On Cash Return

Cash-on-cash return is a frequently used metric in real estate deals, determining the cash income generated from the cash invested in a property. In essence, it gauges the yearly return an investor sees on the property concerning the mortgage payments made within the same timeframe.

Head and formula all over

Cash On Cash Return Formula

The Cash on Cash Return (COC) formula is as simple as it is important. This is a calculation used by most real estate investors to measure the profitability of a current or potential investment. Check out the article on what is annual pre-tax cash flow by wallstreetprep.com.

Cash on Cash = (Annual Pre-Tax cash flow / Total Cash Invested) * 100

Cash On Cash Return Examples

COC Example #1

Let's say you purchase a new rental property for $200,000. You put down the 20% down payment which is $40,000 and have $10,000 in closing costs, making your total cash invested $50,000.

After accounting for all your expenses such as mortgage payments, property taxes, insurance, maintenance, etc.. you generate $500/month which comes out to $6,000/year.

($6,000 / $50,000) * 100 = 12% Cash on Cash Return

COC Example #2

Let's Consider you purchase a commercial property instead of a residential home and this property costs $500,000. For this property the bank may require a 25% LTV which mean you need to put down payment of $125,000. Additionally you will need to pay $15,000 in closing costs bringing your total investment to $140,000.

After deducting all expenses, this property generates you an annual NOI of $2,100/month or $25,200/year.

($25,200 / $140,000) * 100 = 18% Cash on Cash Return

Check out my Resource Page for some of the top software to help you on your Real Estate Journey

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Cash On Cash Return Vs Cap Rate

Cash on Cash Return and Capitalization Rate (Cap Rate) are both metrics used by real estate investors to assess the potential return and profitability of an investment you either own or are looking into purchasing.

The following are some key differences:

Cash On Cash Return:

Focus: Measures the return on cash invested.
Calculation: Calculates the pre-tax cashflow by the total money invested and would be expressed as a percentage.
Use: COC is used by investors who want to understand their return on cash they have invested.

Capitalization Rate (Cap Rate):

Focus: Measures the NOI and the current market value.
Calculation: Calculates the NOI by the current market value which is also expressed in a percentage.
Use: Mostly used to compare potential investments they are interested in. Often used for long-term investments strategies vs short term fix & flips

COC accounts for financing, making it useful for leveraged investments. Cap Rate, on the other hand, is independent of financing and provides a snapshot pf the property's income-generating potential.

They both serve different purposes and offer different perspectives on a properties performance. I know I use both of them in conjunction with each other to give me a more comprehensive analysis of a potential investment.

Sign sating template

Cash On Cash Return Excel Template

Row	A	B
1	Purchase Price	Enter purchase price here
2	Down Payment	Enter down payment here
3	Closing Costs	Enter closing cost here
4	Total Cash Invested	=Sum(B2+B3)
5	Annual Pre-Tax Income	Enter annual income here
6	Cash On Cash Return	=(B5/B4)*100

4 Cash On Cash Return Calculators

The following are 4 property analysis calculators, they are all great but offer slightly different user experiences.

DealCheck

The DealCheck calculator is my personal favorite. You can use this calculator for multiple different investing strategies and it is free. I have upgraded for the extra features but it is not necessary. Check out the article on "Mastering DealCheck" if you would like to learn more about this calculator.

BiggerPockets

BiggerPockets is a popular real estate investing community. They have created multiple calculators for different investing strategies. They offer a free trial but you must be part of the paid community to gain full access.

Relkit

Relkit does offer various real estate investment tools. I have not given them too much of a try since I got used to mine, but from what I can see this Calculator is limited, it is free to try.

PropertyMetrics

PropertyMetrics has an IRR Calculator that can be used but is limited. This one is my least favorite calculator out there but can still be useful for a quick calculation.

Outro

In wrapping up, understanding cash-on-cash return isn't just about crunching numbers—it's about empowering yourself as a real estate investor.

Mastering COC has been a game-changer in my investment journey, allowing me to gauge returns and make confident decisions accurately. By grasping this concept, you can navigate the market effectively, identifying profitable opportunities and building a successful portfolio. Whether you're just starting out or a seasoned investor, leveraging COC provides invaluable insights into property performance and potential returns.

So, as you embark on your investment endeavors, remember that knowledge truly is power, and with COC in your toolkit, you're well-positioned to thrive in the dynamic world of real estate.

Check out my Resource Page for some of the top software to help you on your Real Estate Journey

FAQ

Is a 7% cash-on-cash return good?

7% return might be attractive and considered good, especially if it's relatively low risk or if it outperforms other available investment options. However, in other situations, such as real estate investments or higher-risk ventures, investors might aim for higher returns aiming between 8%-12%.

What is a 20% cash-on-cash return?

20% cash-on-cash return means that for every dollar you invest, you are receiving 20 cents back in cash flow annually.

This level of return is often sought after by investors because it can significantly outperform other investment options and provide a strong income stream.

What is a bad cash on cash return?

Cash-on-cash return below the average returns of comparable investments in the same market or industry could be considered relatively poor or a bad cash on cash return.

What is a cash on cash return for dummies?

Cash on cash return (COC) is a measurement used to evaluate the profitability of an investment, especially in real estate. It's a percentage that shows how much cash flow you're earning relative to the amount of cash you've invested in the property

Is cash-on-cash return better than cap rate?

This is completely subjective. Cash On Cash return measures the total income vs the actual money invested while Cap Rate measures the Net Income Vs the actual money invested. A person might want to utilize both as a good Cash on Cash Return could still mean you have a low Cap Rate depending on your expenses related to the investment.