How to Manually Calculate Your Property’s Cash-On-Cash [COC] Re-turn

As a real estate investor, you need to understand all of the costs that factor into buying, fixing, owning, and operating a rental property. Without assessing these numbers, you won’t have a clear picture of the actual return your cash is earning on your rental investment. 

What is a cash-on-cash return? 

The cash-on-cash return, sometimes known as CCR, is the money you earn each year strictly on the cash component of your property investment. It differs from your return on investment (ROI) because ROI looks at the return on the entire investment, including any debt you acquire to purchase the property.

To calculate your cash-on-cash return: 

Cash-on-cash Return = (Net Operating Income (NOI) / Total Cash Invested) x 100%

Here’s how the numbers look in action:

Let’s say you purchase a rental property for $100,000. Your purchase transaction involves a 20% down payment ($20,000) and $5,000 in closing costs for a total cash outlay of $25,000 to complete the deal. 

Your net operating income (NOI), or your pretax profit after you take in rental income and deduct operating expenses, is $3,000 per year. 

Following the formula above, your cash-on-cash return is ($3,000/$25,000) x 100% to arrive at a 12% annual cash-on-cash return. 

To keep this example simple, we assumed the property needed no upfront cash outlays for large expenses, such as a new roof. This calculation allows you to compare your 12% return on this real estate investment with returns you might earn on other investments such as stocks, bonds, and mutual funds. 

But that’s not the whole story. 

What is a good” cash-on-cash return? 

When you consider your time involved in researching rental markets, acquiring the property, managing the property, and building additional value into the property, you deserve to earn an attractive return on your investment. Of course, cash is the biggest driver of what makes an attractive or “good” return, but it’s not the only factor. Your cash-on-cash return does not include potential appreciation or depreciation to the property over time, which affects your overall return. 

One way to benchmark your CCR is to compare it with return on a Real Estate In-vestment Trust (REIT.) This will help you decide if the actual purchase and management load of owning the property outweighs what you might earn by investing your cash in a REIT – and having none of the responsibility. 

If the stock market returns an average of 8%, some investors consider 8%-12% to be a good CCR for an investment property. According to Mashvisor, others won’t proceed with a deal if the projected CCR is less than 20%. 

What types of properties deliver a good cash-on-cash return? 

It is a common misconception that you can earn higher returns on properties that cost less – but that may not be true.  The CCR is strictly based upon the amount of cash invested and the net income that the asset generates; and, is completely independent of asset class or even asset type.

The common misconception is probably for two reasons: 

  1. it takes less capital to get into a C, D property
  2. stories abound about people buying low in distressed areas and then making big returns when those areas rebound. 

Neither of those reasons factor into a CCR equation. 

A $3,000 net income on a $20,000 cash investment is the exact same as a $30,000 net income on a $200,000 cash investment – both are a 15% CCR.  Some investors feel better only having $20,000 at risk; while other investors are disappointed that they can only put $200,000 at risk when there are 15% returns to be earned.

In addition, some investors would rather put $200,000 cash into a single asset – say a $1m duplex in LA; as opposed to having to find and manage ten $100,000 assets in Detroit to put that same $200,000 cash to work.

Lets explore an actual property at 1536 Smith Street in Green Bay, WI. This neighborhood has a Class C rating. 

When you run a rental rate evaluation report for this property on Rentometer, you’ll find the neighborhood has an average rent of $805 a month. Based on the photos, this property features some nice updates, including stainless steel appliances. It includes a garage, driveway, average backyard for the neighborhood, plus new carpet – and it’s been freshly painted. Based on this information, it could conceivably rent for closer to 75% at $875.

Let’s look at what it would take to purchase and to operate this property: 

At a purchase price of $117,900, your 20% down payment would be $23,580. Closing costs in Wisconsin average $3,000, so your cash investment in the purchase of this house comes to $28,580. 

Since the property does not appear to need work, at an estimated monthly rent of $875, you’ll earn $10,500 for the year. To figure out your net operating income, deduct your expenses – loan principal and interest, property taxes, insurance, repairs, vacancy, and property management. (This house is not in an HOA so that you won’t have the expense of HOA fees.)

Monthly operating costs:

Principal and interest = $395

Property tax = $152*

Insurance = $20*

Repairs (estimated at 5%) = $43.75

Vacancy (estimated at 5%) =$43.75

Property management 8% = $70.00

Total estimated monthly operating costs are $724.50

For the year, that is $8694.00

$10,500 annual rental income

($8694) annual operating costs

$1806 NOI

*graphic from realtor.com

Your cash-on-cash return for this property comes out as follows: 

CCR: $1806/ $28,580 = .0631 x 100= 6.31%

With no work and additional investment necessary and at the projected rental rate, this house looks like a very marginal deal when paying retail prices.  

Cash-on-cash return is only one metric to consider

When you evaluate your purchase of a rental property, you’ll also want to look at the possible ROI. The ROI is the overall amount you could earn on your real estate investment and factors in appreciation of the property, principal reduction, and the tax advantages of owning real estate. 

  • Appreciation: Over time, you can expect real estate to increase in value. This increased property value builds wealth. 
  • Principal reduction: When you have a mortgage, you pay down the principal on that loan with each monthly payment. This principal reduction can pay back what you initially invested as a down payment and building your wealth with equity.
  • Tax advantages: Expenses claimed on the property will reduce your gross income. There are many tax-deductible expenses involved with owning an investment property. 

Many real estate investors use cash-on-cash returns as a good way to evaluate a property’s potential quickly. Online calculators like Rentometer and Mashvisor can help you make calculations faster and confidently move forward with your purchase. 

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