WTF is Cash on Cash Return?

Photo by Allan Mas from Pexels

When investing in real estate — it’s all about the cash flow.

I can see why investors don’t use the awkward acronym — CoC.

Cash on Cash returns are used in real estate transactions to calculate how much you are making on the amount of cash you invested in a property. This calculates a pretax return on your investment.

To calculate the cash on cash return on an investment, divide the property’s annual cash flow by the total cash you invested. For example, let’s say you put $100K into a property that is netting you (positive cash flow after all the bills on the property are paid) $6000 per year. Your cash-on-cash return is 6%.
Sounds fairly straightforward, and it is.

The formula is:
Cash-on-Cash Return = Net Cash Flow/Total Cash Invested.
Easy enough.
The part that requires all the math is calculating the Net Cash Flow. To do that, you take your annual gross rent + any other income (laundry, parking, stores, etc.) and subtract out your operating expenses including vacancy and annual mortgage payments.
What is Gross Rent? It’s the rent you charge before any operating expenses are taken out. It’s typically referred to as gross because it is income before taxes.

What’s the point? Cash on cash return is also called cash yield. It can help you understand the return on the money you invested and might be more analogous to other investing you do. Many of us don’t have access to borrowed money when investing in things other than real estate. So we calculate the return based on our cash outlay. This does the same thing.

Since real estate is often levered with borrowed money, ROI (return on investment) is probably a better metric of our return.