Understanding Cash on Cash Return for Real Estate Investments
Cash on cash return (CoC) is one of the most important metrics real estate investors use to evaluate rental property performance. It measures the annual return the investor makes on the actual cash invested in the property.
Cash on Cash Return Formula
The calculation is straightforward:
(Annual Pre-Tax Cash Flow ÷ Total Cash Invested) × 100 = Cash on Cash Return %
Where Annual Cash Flow = Gross Rental Income - Operating Expenses - Mortgage Payments
What Constitutes a Good Cash on Cash Return in 2024?
- • 8-12%: Average return for most rental properties in current market conditions
- • 12-15%: Strong return indicating a good investment
- • 15%+: Exceptional return - typically found in value-add opportunities or emerging markets
- • Below 8%: May not adequately compensate for risk and illiquidity of real estate
Real-World Example
Consider a property purchased with:
- • $25,000 down payment
- • $5,000 closing costs
- • $5,000 initial repairs
- • Total cash invested = $35,000
- • Annual net cash flow after expenses = $4,200
($4,200 ÷ $35,000) × 100 = 12% cash on cash return
Key Factors That Impact Your Returns
Income Factors
- • Rental income
- • Additional income (parking, storage)
- • Occupancy rates
Expense Factors
- • Property taxes
- • Insurance costs
- • Maintenance
- • Property management
- • Mortgage payments
Limitations of Cash on Cash Return
- • Doesn't account for property appreciation
- • Doesn't consider tax benefits
- • Doesn't factor in loan amortization
- • Short-term metric (annual only)
- • Should be used with other metrics like cap rate and IRR
Frequently Asked Questions
How does cash on cash return differ from ROI?
While both measure investment performance, cash on cash return focuses specifically on the actual cash flow relative to cash invested in a given year, while ROI typically looks at total returns over the entire holding period.
Should I include mortgage principal payments in cash flow?
No, only the interest portion of mortgage payments should be included in cash flow calculations. Principal payments are considered a return of capital, not an expense.