Cash on Cash Return Calculator

| Added in Personal Finance

What is Cash on Cash Return and Why Should You Care?

Ever wondered how much cash you're actually making on your real estate investments? That's where Cash on Cash Return (CoC) comes in. Think of it like this: if your investment were a pie, CoC tells you exactly how much delicious pie (in terms of cash) you're getting back in relation to what you initially invested. Sounds appetizing, right?

You should care about CoC because it not only gives you a clear snapshot of your investment's profitability but also helps you compare different investment opportunities. A good CoC can indicate a solid investment; for instance, a 20% yearly CoC is pretty impressive, meaning your investment will pay for itself in just 5 years. The higher the percentage, the quicker you get your dough back!

How to Calculate Cash on Cash Return

Getting down to the nitty-gritty, calculating Cash on Cash Return is straightforward.

The formula for CoC is:

[\text{Cash on Cash Return} = \frac{\text{Annual Pre-tax Cash Flow}}{\text{Total Cash Invested}}]

Now, let's break it down with a real-world example.

Example Calculation

Imagine you've invested $200,000 in a cozy, little rental property. Over the past year, this property has generated an annual pre-tax cash flow of $30,000.

To find out your CoC percentage:

First, identify the total cash invested:

  • Total Investment Amount: $200,000

Next, determine the annual pre-tax cash flow:

  • Annual Cash Flow: $30,000

Plug these values into our formula:

[\text{Cash on Cash Return} = \frac{30000}{200000} = 0.15]

Multiply by 100 to get it in percentage:

[\text{Cash on Cash Return} = 0.15 \times 100 = 15]

So, your CoC Return is 15%. Not bad, huh?

Where:

  • Annual Pre-tax Cash Flow is the total amount of money generated by the property before any taxes are deducted for the year.
  • Total Cash Invested is the sum of money initially put into the property.

Tips for Investors

  1. Compare Multiple Investments: Use the CoC percentage to compare different properties. Higher percentages mean better returns.
  2. Factor in Other Metrics: While CoC is a great indicator, always consider property appreciation, market conditions, and your risk tolerance.
  3. Re-invest Wisely: If you've got a property with a solid CoC, think about reinvesting your returns into additional properties!

By focusing on CoC, you get a clearer picture of your investment's cash flow and profitability, helping you make smarter, more informed decisions.

Happy investing, and may your returns be ever in your favor!

Frequently Asked Questions

Cash on cash return (CoC) is a metric that measures the annual pre-tax cash flow of an investment relative to the total cash invested. It tells you what percentage of your investment you are earning back each year in cash.

A good cash on cash return typically ranges from 8% to 12% for real estate investments, though this varies by market and property type. A 20% CoC is considered excellent, meaning your investment would pay for itself in about 5 years.

Cash on cash return only considers actual cash invested and cash received, ignoring appreciation and mortgage paydown. ROI includes all returns including equity gains. CoC is more useful for evaluating immediate cash flow.

Yes, CoC is excellent for comparing different investment properties because it standardizes returns based on actual cash invested. However, also consider property appreciation, market conditions, and your risk tolerance.