Cash on cash return, sometimes referred to as CoC or CCR, is a very simple and useful financial tool for real estate investors. It is a calculation that can help investors measure the amount of cash flow, or total cash earned, on the total equity invested in a property. This can be highly beneficial for investors to calculate prior to a deal to compare the potential returns of various investment properties.
How to Calculate Cash on Cash Return
There are two formulas that can be used for calculating the cash on cash return for a real estate investment. CCR will always be demonstrated as a percentage, not to be confused with cash flow which is indicated as an amount.
Take the pre-tax cash flow earned annually, excluding principal debt payments, and divide it by total cash invested to get the CCR.
This calculation includes principal debt payments and is calculated by the pre-tax cash flow earned annually, after interest payments, divided by the total cash invested.
The calculations use pre-tax formulas because the amount of income tax paid will vary from investor to investor. This makes it easier to compare results across different situations.
Cash on Cash Returns vs. All Other Real Estate Investing Metrics
Net Operating Income (NOI)
This metric is used to give investors an idea of the true cash flow of a rental property. One way this tool differs from CCR is that debt service is not included when calculating NOI.
Internal Rate of Return (IRR)
This is a more complex calculation that measures the total percentage return to an investor based on all net cash flows received during the investment period. Investors want to see a high IRR percentage as that usually means a more profitable investment.
The capitalization rate is used to compare the returns of similar properties in the same market as the property the investor is looking at. To calculate the cap rate percentage you must know the NOI and divide it by the market price or current market valuation.
Return on Investment (ROI)
This simple calculation measures the return of an investment compared to the cost. To find the ROI of a property you would subtract the cost of the investment from the current market value, and divide by the cost of the investment.
Each of these calculations can be very useful for investors and can be utilized prior to committing to a deal, increasing the chances of a successful outcome. Understanding these calculations can be very helpful to not only the investor, but also for the lender as they prepare a loan. Having the knowledge on how to use these metrics to your advantage can set you up for success in each step of the real estate investment process!