Cash-on-Cash Return

Cash-on-Cash Return: What it Is and How to Use It

Cash-on-cash (CoC) return measures the annual pre-tax cash income an investor receives from a property relative to the actual cash they invested. It’s a simple, widely used metric in real estate—especially for leveraged (mortgage) transactions—because it focuses on cash yield rather than total return.

Why it matters

• Shows the cash yield on the equity you put into a deal.
• Useful for comparing investment properties or evaluating financing structures.
• Helps forecast expected annual cash distributions from operations.

Formula and components

Cash-on-Cash Return = Annual Pre‑Tax Cash Flow / Total Cash Invested

Annual Pre‑Tax Cash Flow (APTCF) = (Gross Scheduled Rent + Other Income) − (Vacancy + Operating Expenses + Annual Mortgage Payments)

Key terms:
– Gross Scheduled Rent: Potential rent if fully occupied.
– Other Income: Parking, laundry, fees, etc.
– Vacancy: Lost rent from vacant units.
– Operating Expenses: Maintenance, insurance, property management, taxes.
– Annual Mortgage Payments: Total principal + interest paid during the year.
– Total Cash Invested: Down payment + closing costs + any out-of-pocket capital or initial repairs.

Note: CoC is a pre-tax metric and reflects actual cash flows, so principal repayment lowers annual cash flow even though it increases equity.

How to calculate (step-by-step)

1. Estimate gross rental income and add other income.
2. Subtract expected vacancy and operating expenses to get net operating income (NOI).
3. Subtract annual mortgage payments from NOI to get annual pre-tax cash flow.
4. Add up all cash outlays at purchase (down payment, closing costs, immediate repairs) to find total cash invested.
5. Divide annual pre-tax cash flow by total cash invested and express as a percentage.

Example

An investor buys a property for $1,000,000:
– Down payment: $100,000
– Upfront costs (closing, insurance, maintenance): $10,000
– Mortgage: $900,000
After one year:
– Total mortgage payments: $25,000 (including $5,000 principal)
– Investor sells the property for $1,100,000 and repays remaining mortgage balance of $895,000

If you treat the one-year holding as a single-period cash analysis:
– Total cash outflow (initial cash invested + mortgage payments): $135,000 ($100,000 + $10,000 + $25,000)
– Cash returned from sale after repaying loan: $205,000 ($1,100,000 − $895,000)
– Net cash received during the period: $205,000 − $135,000 = $70,000
– Cash-on-cash return = Net cash flow ÷ Total cash invested = $70,000 ÷ $135,000 ≈ 51.9%

(For ongoing operations without a sale, use only annual operating cash flow in the numerator.)

Interpretation and common uses

• A higher CoC indicates better annual cash yield on invested equity.
• Investors use CoC to screen deals, compare financing options, and set target cash return thresholds.
• CoC is most useful for assessing short-term cash performance and distribution potential.

Limitations

• Pre-tax: ignores tax impacts and after-tax returns.
• Time value of money: CoC is a simple rate that doesn’t account for multiple years or discounting.
• Appreciation and total return: excludes unrealized gains from price appreciation unless you include sale proceeds in a holding-period calculation.
• Principal paydown effects: principal repayment reduces annual cash flow but increases equity; CoC treats principal repayment as a cash outflow.
• Risk and vacancy variability: sensitive to assumptions about rents, vacancies, and expenses.

Practical tips

• Use consistent assumptions when comparing properties (rent, vacancy, expenses).
• For multi-year investing, complement CoC with metrics that capture appreciation and time value (IRR, total ROI).
• Separate operational CoC (from rents) from one-time event calculations that include sale proceeds.
• Remember CoC is a cash-yield metric—valuable for income-focused investors but incomplete for total wealth analysis.

Quick FAQs

• What’s a “good” CoC return? Depends on market, property type, and risk—many investors target anywhere from single digits to 20%+ for higher-risk deals. Compare against local alternatives and financing costs.
• Does CoC include principal repayment? Yes—mortgage payments (principal + interest) reduce annual pre-tax cash flow.
• Is CoC the same as ROI? No. ROI often considers total return (including appreciation and taxes), while CoC focuses on cash yield relative to cash invested.