A Beginner’s Guide to Real Estate Investing
Introduction: Real estate investment offers various metrics to gauge the potential profitability of a property. One such metric is “cash-on-cash return.” In this blog post, we’ll break down cash-on-cash return in simple terms and provide examples to help you understand how it works.
What is Cash-on-Cash Return? Cash-on-cash return (CoC) is a financial metric used by real estate investors to assess the annual return on their invested cash. It measures how much cash income an investor is making on their initial cash investment in a property. In essence, it answers the question: “How much money am I making relative to the cash I’ve put into this property?”
Calculating Cash-on-Cash Return: To calculate CoC return, you need two essential pieces of information:
- Annual Cash Flow: This is the net income generated by the property after all expenses, including operating costs, mortgage payments, property taxes, insurance, and maintenance.
- Initial Cash Investment: The amount of money you initially invested in the property, which includes the down payment, closing costs, and any upfront renovation or repair expenses.
The CoC formula is straightforward:
Cash-on-Cash Return (CoC)=Annual Cash FlowInitial Cash Investment×100
Example: Let’s consider a real-world example. You purchase an investment property for $200,000, and after accounting for your down payment, closing costs, and some minor repairs, your initial cash investment totals $50,000. In the first year of ownership, the property generates $8,000 in net cash flow.
Using the formula:
CoC=8,00050,000×100=16
In this example, your cash-on-cash return for the first year of owning the property is 16%.
Interpreting Cash-on-Cash Return: Understanding the CoC return is relatively straightforward:
- A higher CoC percentage indicates a better return on your invested cash.
- A lower CoC percentage suggests that a significant portion of your cash remains tied up in the property, potentially limiting your ability to invest elsewhere.
Factors to Consider: While CoC return is a useful metric, keep these factors in mind:
- Financing: The CoC return does not consider financing or mortgage terms. Consider how your financing costs affect your overall return.
- Time Frame: CoC return is typically calculated on an annual basis, but you may want to project it over several years to account for changes in income or expenses.
- Risk and Opportunity Cost: Consider your risk tolerance and other investment opportunities when assessing CoC return.
Conclusion: Cash-on-cash return is a valuable tool for real estate investors to evaluate the profitability of an investment property in simple terms. By understanding how to calculate and interpret CoC return, you can make more informed investment decisions and assess the potential returns on your cash investment. Always remember to consider other factors and seek professional advice when making real estate investment decisions.
Steve Schappert Founded, and is the broker at Connecticut Real Estate, Schappert owns The Connecticut Art Gallery and Home & Art Magazine Steve also designed, built, and shipped a zero-energy double-walled home to Germany. Schappert is an abstract painting artist and has painted, renovated and provided energy audits for over 1300 homes.
When it comes to real estate, construction and energy efficiency, Steve Schappert is one of the most sought-after experts in the field. With more than 40 years of experience in these areas, he has become a trusted source for reporters looking for insights on the industry. From helping develop net-zero homes to advising on sustainable building practices, Schappert’s knowledge and expertise is unrivaled. Whether it’s for a news article or an in-depth magazine story, reporters turn to Steve Schappert as a reliable source of information. With his expertise and guidance, they can ensure that their stories are accurate and up-to-date.
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