Cash on Cash Return (CoC Return): A Real Estate Investor's Equivalent to Dividend Yield and Interest Rates

Cash on Cash Return (CoC Return) is a fundamental metric for real estate investors. Think of it as the real estate equivalent of dividend yield for stocks or the interest rate on a savings account. It reveals the annual return on your invested cash, giving you insight into a property's potential profitability, considering both income and financing costs.

The Formula

Cash on Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) * 100

• Annual Pre-Tax Cash Flow: This is the net income generated by the property after all expenses, including debt service (if applicable), are paid, but before taxes are taken out. It includes rental income, laundry income, and any other sources of revenue, minus expenses like property management fees, repairs and maintenance, insurance, property taxes, and debt service (principal and interest payments on the mortgage).
• Total Cash Invested: This is the total amount of cash you've put into the property. It includes your down payment, closing costs, renovation expenses, and any other cash outlays related to the investment.

How Investors Use Cash on Cash Return

1. Evaluating Investment Potential: CoC Return is a quick way to compare different real estate investments while factoring in financing costs. Similarly, stock investors use dividend yield to compare the income potential of different stocks.
2. Setting Investment Goals: Knowing your desired CoC Return helps you find properties that align with your financial objectives, just as you might set a target interest rate for a savings account.
3. Monitoring Performance: Tracking CoC Return over time helps you assess a property's performance, considering both income generation and debt obligations, similar to how you would track the dividend payments of a stock over time.

CoC Return vs. Dividend Yield vs. Interest Rates

• Cash on Cash Return (Real Estate): Annual return on invested cash (excludes appreciation, taxes, and long-term potential).
• Dividend Yield (Stocks): Annual dividend income relative to price (affected by company performance and stock price fluctuations).
• Interest Rate (Savings): Annual return on deposited cash (typically fixed or variable, lower risk but also lower return).

Drawbacks of Cash on Cash Return

• Ignores Appreciation: It doesn't account for potential property value increases, a key component of real estate returns, just as dividend yield doesn't account for stock price appreciation.
• Excludes Taxes: The calculation is pre-tax, so you need to factor in tax implications separately, similar to how taxes affect dividend income.
• Short-Term Focus: It only looks at one year's performance and doesn't consider the long-term potential of an investment, a limitation shared with simple interest rate calculations.

How propscore.io Can Help

PropScore.io is a powerful tool that simplifies real estate analysis. It automates the calculation of Cash on Cash Return, along with other essential metrics, helping you quickly evaluate investment properties. With PropScore.io, you can:

• Calculate CoC Return with Ease: Input your property data, and PropScore.io will instantly calculate your CoC Return, saving you time and effort.
• Compare Multiple Properties: Analyze multiple properties side-by-side to identify the ones with the highest potential CoC Return.
• Factor in Financing: PropScore.io allows you to input your financing details (down payment, interest rate, etc.) to see how they impact your CoC Return.
• Assess Sensitivity: Test different scenarios by adjusting variables like rental income or expenses to see how they affect your CoC Return.

Cash on Cash Return Example (Including Debt Service)

Let's say you buy a rental property for $200,000 with a $50,000 down payment and $150,000 mortgage at 7% interest (30-year fixed). Your annual rental income is $15,000, and annual operating expenses (excluding debt service) are $2,000. The annual debt service is estimated at $11,000.

Annual Pre-Tax Cash Flow = $15,000 (Rental Income) - $2,000 (Expenses) - $11,000 (Debt Service) = $2,000
Cash on Cash Return = ($2,000 / $50,000) * 100 = 4%