Demystifying Cash-on-Cash Return:
A Beginner’s Guide to Real Estate Investing
The property’s Cash-on-Cash Return (CoC) is a way to measure how much profit you’re making compared to the money you’ve invested.
Formula: CoC = (Annual Cash Flow / Total Cash Invested) x 100
- Annual Cash Flow: This is how much money you make from the property each year after paying all expenses but before taxes.
- Total Cash Invested: This is the amount of money you initially put into the property, including the down payment and other costs.
If CoC is 10%, it means for every $100 you invested, you’re making $10 in profit each year. It helps you see how well your investment is doing. A higher CoC is usually better, but it depends on your goals and the property.
In your specific case, you would need the numbers for Annual Cash Flow and Total Cash Invested to calculate the CoC return.
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=50,000/
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 returns, 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.
Interpreting Cash-on-Cash Return:
- A higher CoC indicates that you’re earning a better return on your investment. It’s often preferred, but the ideal CoC varies depending on factors like location, property type, and market conditions.
- A CoC below 100% means your property is not generating enough cash to cover your initial investment in a year. It’s common for CoC to be less than 100%, especially when you’ve financed the property.
- A CoC above 100% implies your property is generating more cash than you initially invested in a year. This is a positive sign and can result from a high rental income relative to your investment.
Real Estate Investment Considerations:
- CoC is just one metric. Consider other factors like property appreciation, tax benefits, and your long-term investment goals when evaluating a property.
- CoC is helpful for comparing different investment opportunities, but it doesn’t provide the complete picture of your investment’s success.
- CoC is commonly used in real estate investment, but it’s essential to use it alongside other financial metrics to make well-informed investment decisions.
Remember, real estate investment can be complex, and it’s a good idea to consult with a financial advisor or real estate professional to assess potential investments thoroughly.
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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