What is Cash On Cash Return & Why Does It Matter?
Cash On Cash Return (COC) is a crucial metric for real estate investors, measuring the annual return on investment based on the property's cash inflows and outflows. It helps investors evaluate the profitability of a rental property, comparing it to other investment opportunities. A high COC indicates a better return on investment, while a low COC may signal a need to reassess the property's management or consider alternative investments.
How to Calculate Cash On Cash Return (The Formula)
The Cash On Cash Return formula is:
COC = (Annual Net Operating Income / Total Cash Invested) x 100
Where:
- Annual Net Operating Income (NOI) = Gross Rental Income - Operating Expenses
- Total Cash Invested = Down Payment + Closing Costs + Rehab/Renovation Costs
Step-by-Step Practical Example
Let's say you're considering purchasing a rental property with the following details:
| Property Details | Values |
|---|---|
| Purchase Price | $200,000 |
| Down Payment | $40,000 (20%) |
| Closing Costs | $8,000 |
| Rehab/Renovation Costs | $15,000 |
| Gross Rental Income | $30,000/year |
| Operating Expenses | $10,000/year |
Using the COC calculator, you input the values and get:
COC = (Annual Net Operating Income / Total Cash Invested) x 100 = (($30,000 - $10,000) / ($40,000 + $8,000 + $15,000)) x 100 = 12.5%
What is a "Good" Cash On Cash Return? (Industry Benchmarks)
A good COC varies depending on the location, property type, and market conditions. However, here are some general guidelines:
- 8-12%: Average COC for single-family homes in stable markets
- 10-15%: Average COC for apartments and multi-unit properties
- 12-18%: Average COC for commercial properties or properties in high-growth areas
Keep in mind that these are general benchmarks, and a "good" COC ultimately depends on your investment goals and risk tolerance.
Common Mistakes to Avoid
When calculating COC, investors often make the following mistakes:
- Ignoring closing costs and rehab expenses: Failing to account for these expenses can inflate the COC and lead to inaccurate investment decisions.
- Not considering vacancy rates and rent fluctuations: Failing to account for potential vacancies and rent fluctuations can result in overly optimistic COC calculations.
- Comparing COC across different property types: COC can vary significantly between property types, so it's essential to compare COC within the same property type or adjust for differences in property characteristics.
Frequently Asked Questions (FAQ)
Q: What is the difference between Cash On Cash Return and Cap Rate?
A: Cash On Cash Return measures the annual return on investment based on the property's cash inflows and outflows, while Cap Rate measures the property's value based on its net operating income.
Q: How does Cash On Cash Return differ from ROI (Return on Investment)?
A: Cash On Cash Return focuses on the cash invested in the property, while ROI considers the total investment, including any financing.
Q: Can I use Cash On Cash Return to compare different investment opportunities?
A: Yes, COC can be used to compare different investment opportunities, but it's essential to consider other factors, such as risk, market conditions, and property characteristics, to make informed investment decisions.