What is Cash on Cash (CoC) Return?

One of the fundamental concepts that quickly helped me in evaluating investments was understanding "Cash on Cash Return." It's a term you'll encounter often in the world of real estate investing, and understanding it is essential to making informed decisions. So, let's break it down and help you understanding what Cash on Cash Return does in the evaluation process.

What Is Cash on Cash Return?

At its core, Cash on Cash Return (CoC) is a financial metric used to evaluate the profitability of an investment property, specifically in the context of income-producing real estate. It measures the annual return an investor can expect to receive on their actual cash investment in a property. In simpler terms, it tells you how much money you're making on the money you've put into the deal.

The Formula:

CoC Return (%) = (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100

Let's break down the key components of this formula:

1. Annual Pre-Tax Cash Flow: This represents the net income generated by the property after deducting all operating expenses (property management fees, taxes, insurance, maintenance costs, etc.). It's essentially the money that flows into your pocket each year from the property.

2. Total Cash Invested: This includes not only your initial purchase price but also any additional cash you invest in the property for renovations, improvements, or other expenses.

Why Is Cash on Cash Return Important?

1. Performance Indicator: CoC Return helps you gauge how well your investment is performing in terms of generating cash income relative to the amount of cash you've invested.

2. Risk Assessment: It's a valuable tool for assessing the risk associated with an investment. A higher CoC Return generally indicates a more attractive risk-adjusted opportunity.

3. Comparative Analysis: CoC Return allows you to compare different investment properties and choose the ones that align with your financial goals.

An Example:

Let's say you invest $200,000 in a commercial property. After a year, you receive $20,000 in pre-tax cash flow from the property. Using the formula:

CoC Return = ($20,000 / $200,000) x 100 = 10%

In this scenario, your Cash on Cash Return is 10%, meaning you've earned a 10% return on your $200,000 investment in one year.

Interpreting the CoC Return:

• A higher CoC Return indicates a more attractive investment, but it should be evaluated in the context of your investment goals and risk tolerance.

• CoC Return doesn't consider factors like property appreciation or mortgage paydown, so it's just one piece of the investment puzzle.

• It's crucial to consider the local market, property type, and your long-term investment strategy when assessing the CoC Return.

Cash on Cash Return is a vital tool in the real estate investor's toolbox, helping to provide a clearer picture of the cash income generated by your investment relative to the cash you've put into it. As a new investor, understanding and using this metric will help you make more informed investment decisions and navigate the exciting world of commercial real estate with confidence. So, keep your eye on CoC Return as you explore investment opportunities – it's your financial compass in the real estate landscape.