Cash on cash return (CoC) and return on investment are two real estate metrics to help you and other real estate investors assess real estate investment performance. As you become more familiar with the term and the factors associated with it, you will make better decisions and consequently make money (a lot of it!) investing in real estate.
Experienced real estate investors often prefer to use cash on cash return over return on investment as the former proves to depict a better idea of the performance of the cash invested into the property. But note that successful investors do not just rely on cash on cash return as a rate to evaluate the performance of a real estate investment property, and nor should you. They supplement their assessment by also calculating the internal rate of return (IRR) and the capitalization rate, often just called the cap rate.
What Is Cash on Cash Return?
Cash on cash return is the cash income that you as a real estate investor should earn on a real estate investment. This rate of return does not just take into account the total return on investment, it just measures the return on the actual cash invested. If, for example, you want to buy a rental property and are indebted to put down a cash down payment of 10%, then the CoC return would measure the annual return you, or the real estate investor, made on the property with regards to the down payment only.
Cash on cash return is calculated by dividing the cash flow before tax over the equity invested. To calculate cash on cash return, you need to know net operating income, equity, and the value of mortgage. Mashvisor’s rental property calculator can do these calculations for you. Not only will the rental property calculator calculate cash on cash return, but also capitalization rate and cash flow. Visit Mashvisor to learn more about its rental property calculator.
Here’s an example. David is investing in real estate and buying a rental property for $300,000. He plans to put down a down payment of 30% of the property price or $90,000, and take a mortgage with a 7% interest to pay out the rest. He then, would pay extra fees for maintenance, insurance, and other closing fees, let’s say of about $15,000.
Assuming David will make about $24,000 in rental income from renting out the house in one year, the net operating income would be that minus $15,000 in fees paid out. The net operating income, or NOI, is the annual rental income generated by rental properties after taking into account operations and deducting expenses made from operations. The net operating income here would equal $9,000. Thus, the CoC return would be the net operating income divided by the cash invested, or $9,000/$90,000. The cash on cash return would be 10%. The money earned is about 10% of the money used for the investment.
Advantages of Using Cash on Cash Return
Unlike the more complex methods of assessing an investment’s performance such as the internal rate of return (IRR), the cash on cash return is much simpler. It is basically the cash you have after 12 months divided by the total amount of cash you invested. Its simplicity in calculating the percentage return should be an incentive for real estate investors and real estate agents like you to use this metric to assess and evaluate investment property deals.
The metric additionally has proved to be effective in calculating the effect of leverage when using a mortgage loan to finance your purchase. The cash on cash return makes a great indicator for the effect of leverage since it only looks at the net cash flow and compares it to the actual amount of cash invested. Using leverage will, however, decrease you cash on cash return. Beware!
Finally, the rate allows for investors to assess and easily compare investments of different types from rental property to lending and investing in stocks or bonds. Although the CoC return does not take into account risks, yet it allows for a universal comparison between different investments.
Disadvantages of Using Cash on Cash Return
Despite its efficacy, the CoC return yet has limitations in its calculation. First, the metric ignores risks associated with investments; it does not take into account opportunity costs. Second, it ignores the effect of compounding interest, thus, making longer-term investments with lower cash on cash return unappealing. Third, the rate uses pre-tax numbers and does not account for principal payments. Lastly, cash on cash return does not take into account appreciation and should only be used for value investing rather than for speculation. We recommend that you use other rates along with the CoC return to better assess and evaluate the performance of an investment.
Here Are the Top Performing Cash on Cash Return Cities
Las Vegas, NV
- Median price: $364,666
- Average price per sq. ft.: $1,978
- Traditional rentals CoC return: 2.67%
- Airbnb rentals CoC return: 4.59%
Considered one of the most visited cities in the United States, Las Vegas shows great prospects for gains made from rental properties. This is because home prices continue to be affordable and low, and rents high, exhibiting a preference towards rental properties. Consider Las Vegas for high CoC return on investments.
Nashville, TN
- Median price: $503,685
- Average price per sq. ft.: $2,149
- Traditional rentals CoC return: 2.32%
- Airbnb rentals CoC return: 5.88%
The growing job market in Nashville has contributed greatly to an increase in demand for both residential and commercial spaces. In turn, many construction efforts have been made to accommodate any shortage in inventory. Need you not to worry because homes are still affordable. Single-family housing, particularly, continues to be the most demanded and yet affordable, therefore making it an optimal choice for investment opportunities and a potential for high cash on cash return.
Mashvsior can help you find property listings to suit your needs. Click here and explore!
Colorado Springs, CO
- Median price: $367,393
- Average price per sq. ft.: $2,534
- Traditional rentals CoC return: 2.91%
- Airbnb rentals CoC return: 6.44%
The number of sold properties and number of listings have increased significantly towards the end of 2017. This has consequently showed grand potential for investment and high cash on cash return. Homes take less time to be listed and sold; however, median prices are now a tiny bit higher as a response. Colorado Springs remains to be a top performing real estate market in the United States and one to consider today.
Whether it’s Colorado Springs, Las Vegas, or Nashville, investing in real estate is a good choice for investment opportunities today. Buying rental properties, particularly, depicts a grand potential for high cash on cash return. We recommend that you sign up for Mashvisor and get to know more about CoC return.