What is cash-on-cash return (CoC)?
– Cash-on-cash return is a simple ratio that compares the annual pre‑tax cash an investor receives from a property to the actual cash they put into the deal. It is most often used in real estate to evaluate income-producing properties that use financing (debt). Because it focuses on cash invested rather than total capital (including borrowed funds), it gives a clear view of the yield on the investor’s cash outlay.
Key formula and component definitions
– Cash-on-cash return = Annual pre‑tax cash flow ÷ Total cash invested
– Annual pre‑tax cash flow = (Gross scheduled rent + Other income) − (Vacancy + Operating expenses + Annual mortgage payments)
– Gross scheduled rent (GSR): total rent if all units are occupied at contract rent.
– Other income (OI): e.g., parking, laundry, fees.
– Vacancy (V): estimated lost rent from empty units.
– Operating expenses (OE): property taxes, insurance, maintenance, management, utilities paid by owner, etc.
– Annual mortgage payments (AMP): total cash payments to the lender in the year (interest + principal paid).
What CoC tells you
– It measures cash yield on the investor’s equity contribution (pre‑tax).
– It does not automatically include tax effects, depreciation, or non‑cash accounting items.
– CoC is useful for comparing different financed deals or understanding how leverage affects cash returns.
– It can be computed for one year (typical) or used as a projection for future years, but projected returns are targets, not guarantees.
How CoC differs from ROI (return on investment)
– ROI normally measures total return, which can include capital appreciation and may consider total capital (equity + debt) or overall profit over cost.
– CoC specifically measures return on the cash actually invested by the owner and typically uses only pre‑tax cash flows. Because mortgage debt is common in real estate, CoC and ROI will often differ.
Step‑by‑step checklist to compute cash-on-cash return
1. Determine all cash you invested up front and during the period (down payment, closing cash, repairs paid out of pocket, any operating cash injections). This is Total cash invested.
2. Calculate gross scheduled rent and add any other income (parking, laundry).
3. Subtract expected vacancy losses to get effective rental income.
4. Subtract operating expenses to get net operating income (NOI).
5. Subtract annual mortgage payments (total cash payments to lender) from NOI to get Annual pre‑tax cash flow.
6. Apply the formula: CoC = Annual pre‑tax cash flow ÷ Total cash invested.
7. Express result as a percentage. Note whether your cash flows include any sale proceeds (capital event) — including a sale changes the meaning of “annual” cash flow.
Common pitfalls and assumptions to check
– Is the cash flow pre‑tax? (CoC typically is pre‑tax.)
– Are you including principal repayment? Principal portion of mortgage payments is a cash outflow but not an expense for tax; include it in cash flow calculations because it’s real cash leaving your pocket.
– Are you counting sale proceeds? Standard annual CoC usually excludes capital gains from a sale; if you include a sale, state that you are calculating a realized one‑year cash return, not the ongoing annual yield.
– Is vacancy realistic and are operating expenses full and current?
– CoC ignores tax benefits (depreciation, deductions) and non‑cash accounting adjustments.
Worked numeric example (step‑by‑step)
Situation: An investor buys a property for $1,000,000.
– Cash down payment: $100,000
– Additional out‑of‑pocket closing/initial expenses: $10,000
– Loan amount: $900,000
– During the year the investor makes total mortgage payments of $25,000 (this includes $5,000 principal repayment).
– After one year the investor sells the property for $1,100,000 and repays the outstanding mortgage balance of $895,000.
Step calculations: