Cash-on-Cash (CoC) Return 

When evaluating an investment property, using rental metrics and analytics is crucial for making informed decisions. Metrics provide a clear picture of a property’s current or potential financial performance, helping investors gauge profitability and mitigate risks. Cash-on-cash return (CoC) is one metric that can help investors optimize their portfolios, ensuring they make the most out of their real estate ventures.  

What is Cash-on-Cash Return?  

Cash-on-cash (CoC) return, sometimes referred to as cash yield, is the ratio of your income to the amount of money you originally invested. In the case of a real estate investment, a CoC return refers to the cash earned on the cash invested in a property. 

CoC return is different from return on investment (ROI). While both metrics measure the profitability of an investment, ROI measures the overall rate of return on your investment, whereas CoC return focuses specifically on the cash flow aspect and measures the equity or actual cash returned on actual cash invested. 

Cash-on-Cash Return Formula  

The formula for CoC return is below: 

Cash-on-cash return = Pre-tax annual cash flow / Total cash invested

This formula divides your annual pre tax cash flow by your total cash invested (the amount of money you originally invested in the property). 

To calculate this, you’ll first need to assess your pre-tax annual cash flow. The formula for this is as follows: 

Pre-tax annual cash flow = (Monthly rental income-(Monthly operating expenses + monthly mortgage payment))*12, or other period 

This formula uses your monthly income, subtracts any monthly expenses and bills you may have to pay, and multiplies it by 12 to calculate the cash flow you’ll bring in during a one-year period.  

When to Use Cash-on-Cash Return 

CoC return can be used in several different situations, but it should always be used thoughtfully with knowledge of its limitations. Here are a few examples of when it makes sense for real estate investors to use the cash-on-cash return formula: 

• During the first few years of owning a property. When you’re in your first year or two of renting out a property, it’s smart to calculate your CoC return to estimate its performance and success. After several years, your property is more likely to run into factors and risks that decrease the accuracy of your CoC return. 

• As a quick analysis or comparison method. If you’re someone who looks at dozens of properties before making an investment, speed is paramount to your decision-making. CoC return is a great way to help you sort these properties into initial “interested” and “not interested” piles that you can consider in more detail later. 

• For buy-and-hold investors. Since the strategy for a buy-and-hold investor is to rent out properties over a longer period rather than selling them, it’s common for them to use cash-on-cash returns to evaluate these investments over time. 

How to Use the Cash on Cash Return Calculator  

Though the cash on cash return calculator computes a simple formula, it can still save you valuable time and effort as a property owner that you would otherwise spend crunching the numbers manually. Innago’s calculator makes it easy to find your CoC return quickly — and if you’re maintaining a long list of properties, speed can make a huge difference when computing metrics.  

Below, we’ll look at what numbers you’ll need to input to calculate cash on cash return and what your output will look like. 

Inputs  

Here are the inputs you’ll need to use the real estate cash on cash return calculator:  

1. Monthly rental income 
2. Monthly operating expenses 
3. Monthly mortgage payment 
4. Holding period (e.g., 12 for 1 year) 
5. Total cash invested 

Monthly rental income is your total income generated by a property each month. There are several forms of income to include when summing your rental income: 

• Rent 
• Nonrefundable deposits (e.g., pet deposits) 
• Parking fees 
• Utilities 
• Other payments received for the use or occupation of a property 

Monthly operating expenses are the sum of all non-variable, regular monthly expenses you expect to incur from a property. Operating expenses include: 

• Property management fees (including software fees) 
• Advertising and listing fees 
• Landlord insurance premiums 
• Property taxes 
• Cleaning and maintenance fees 
• Supplies 
• Travel costs (if you travel to your office or properties) 
• Legal fees 
• HOA fees 
• Any utilities you cover 

Your monthly mortgage payment is the amount of cash that goes toward your mortgage each month. Mortgage payments include principal and interest.  

The holding period is the number of months you want to include in the calculation, usually 12 for an annual assessment.  

Your total cash invested is the total amount of cash originally invested into the property. This includes a down payment, any closing costs, and other upfront repairs or renovations completed and paid into the initial investment. 

Together, the first four inputs will give you your pre-tax annual cash flow. This number will then be divided by your total cash invested to give you the CoC return on your property. 

Outputs  

After you’ve entered the above values into Innago’s real estate cash on cash return calculator, the following outputs will be calculated: 

• Pre-tax annual cash flow 
• Cash-on-cash return 

CoC return is expressed as a percentage, the cash earned on cash invested. 

How to Interpret Your Cash-on-Cash Return 

What is a good CoC return?  

What makes a “good” CoC return varies depending on your market and the specifics of your investment. According to Mashvisor, a general industry standard for a “good” cash-on-cash return rate is between 8-12%. Properties in this range are usually strong investments, recovering those percentages of the capital that was originally invested each year. A property with an 8.5% CoC return rate, for example, will generate enough revenue to cover the entirety of the original investment in about 12 years. 

However, as with other metrics in real estate investing, CoC returns shouldn’t be used alone. The context of your CoC return percentage matters, and unforeseen changes could affect your income and percentage from year to year, like unexpected expenses or vacancies, inflation, taxes, equity, appreciation, risk and opportunity costs, and major renovations. Consider CoC return as just one tool in your toolbox of rental property analysis, alongside other metrics like cap rate, annual net cash flow, net operating income, etc. 

Conclusion  

When used mindfully and in coordination with other metrics, cash-on-cash return can be a highly valuable metric for measuring the success of your properties. Innago’s cash on cash return calculator real estate tool is the first step in that assessment and is a valuable tool for understanding your rental business’ financial health.