One way to increase your chances of success in real estate investment is to work out the value of properties in your portfolio so you can make smarter investment decisions. That’s where cash-on-cash return (or CoC, for short) comes in. It’s a valuable financial metric for investors because it measures net cash flow from a property as a percentage of your total investment. Almost every investor uses this calculation, and you should too.
It’s easy to calculate CoC. You take the amount of cash flow from a particular period (pre-tax) and divide it by the total amount of cash you invested into the property during that same time. (A good CoC is anything over 10%.) An investment can include home loan repayments and repair costs. Investors use the CoC calculation to work out the value of commercial properties, but you can use it for residential properties, too.
Remember, you can only use CoC to calculate the value of a property in a period that’s already happened (such as the previous 12 months), so it can’t make predictions about the future. However, CoC gives you an insight into how much cash your existing property or properties generate right now.
Although they look like similar calculations, CoC is different from return on investment (ROI). That’s because ROI doesn’t always consider debts like home loans in its calculation. Therefore, CoC can provide a more precise estimation of how well your real estate investment is performing.
Cash-on-cash return case study
Say an investor purchased a property 12 months ago. She bought the property in cash so she didn’t have to take out a loan from a bank. The investor generated rental income from the property during the previous 12 months. However, she spent money renovating the building.
Her pre-tax cash flow from the property during the year is her total rental income. To work out the CoC, she needs to divide her pre-tax cash flow by the amount she invested in the property for the year (the amount she spent on renovating the building).
The bottom line
Cash-on-cash return is a calculation that measures the value of a property (typically a commercial one) in a specific period. To calculate CoC, you need to divide your pre-tax cash flow by the amount you invested in a property at a particular time. A rule of thumb for good CoC is anything over 10%. Use CoC to measure net cash flow from your property as a percentage of your total investment. This metric helps you determine whether investments in your real estate portfolio provide you with the returns you need.
