Cash-on-Cash Return (CoC) is a way to measure the profitability of a real estate investment. It's a simple formula that tells you how much cash you are earning on the cash you invested. This is useful for real estate investors because it shows how well their money is working for them. In this blog we gonna explore cash on cash return, the key metric every real estate investor should know.
To calculate Cash-on-Cash Return, you use this formula:
Cash-on-Cash Return = Annual Pre-tax Cash Flow / Total Cash Invested × 100
Annual Pre-tax Cash Flow: The amount of money you make from your property each year before paying taxes.
Total Cash Invested: The total amount of your own money that you put into buying the property.
Why It Matters
Cash-on-Cash Return is important because it helps investors compare the profitability of different properties. It gives a clear picture of how much money they are making compared to how much they have invested. This helps investors make better decisions about where to put their money.
A Realistic Example
Let's look at a realistic example to understand how Cash-on-Cash Return works.
Imagine you buy a small rental property.
Here are the details:
Purchase Price: $200,000
Down Payment: $40,000 (20% of the purchase price)
Loan Amount: $160,000 (the rest of the purchase price)
Annual Rental Income: $24,000
Annual Expenses: $6,000 (property management, maintenance, insurance, etc.)
Step-by-Step Calculation
Calculate Annual Pre-tax Cash Flow:
Annual Rental Income: $24,000
Annual Expenses: $6,000
Annual Pre-tax Cash Flow: $24,000 - $6,000 = $18,000
Total Cash Invested:
Down Payment: $40,000
Closing Costs (e.g., fees for inspections, appraisals, and legal work): let's say $5,000
Total Cash Invested: $40,000 + $5,000 = $45,000
Calculate Cash-on-Cash Return:
Annual Pre-tax Cash Flow: $18,000
Total Cash Invested: $45,000
Cash-on-Cash Return: 18,000 / 45,000 × 100 = 40%
So, in this example, the Cash-on-Cash Return is 40%. This means you are earning 40 cents for every dollar you invested each year.
Latest Information and Trends
According to the latest data, the real estate market has been showing steady growth in many parts of the United States. In 2024, the average Cash-on-Cash Return for rental properties varies widely depending on location, property type, and market conditions.
Current Trends
Urban Areas: In major cities, where property prices are higher, Cash-on-Cash Returns tend to be lower. For example, in cities like New York and San Francisco, the average CoC return can be as low as 3-5%.
Suburban Areas: In suburban areas, where property prices are more moderate, CoC returns are typically higher. For example, in cities like Dallas and Atlanta, the average CoC return is around 8-12%.
Rural Areas: In rural areas, property prices are generally lower, and CoC returns can be quite attractive, sometimes exceeding 15%.
Example Markets in 2024
New York City, NY: Average CoC Return: 3-5%
San Francisco, CA: Average CoC Return: 3-5%
Dallas, TX: Average CoC Return: 8-12%
Atlanta, GA: Average CoC Return: 8-12%
Des Moines, IA: Average CoC Return: 10-15%
These numbers reflect the varied nature of real estate investments across different markets.
Factors Influencing Cash-on-Cash Return
Several factors can influence the Cash-on-Cash Return of a property. Here are some of the key ones:
Rental Income
The amount of rent you can charge is crucial. Higher rental income increases your annual pre-tax cash flow, which boosts your CoC return.
Expenses
Keeping expenses low is important. This includes property management fees, maintenance costs, taxes, insurance, and any other costs associated with the property. Lower expenses mean higher net income and a better CoC return.
Financing Terms
The terms of your mortgage or loan can greatly affect your return. Lower interest rates and favorable loan terms can reduce your monthly payments, increasing your cash flow.
Vacancy Rates
The amount of time your property sits empty can reduce your income. High vacancy rates can significantly impact your annual cash flow.
Property Appreciation
While Cash-on-Cash Return focuses on the cash flow, property appreciation can also play a role in your overall investment return. If the value of your property increases over time, this can provide additional returns when you sell.
How to Improve Cash-on-Cash Return
If you want to improve your Cash-on-Cash Return, here are some strategies:
Increase Rent: If the market allows, raising the rent can directly boost your annual pre-tax cash flow.
Reduce Expenses: Look for ways to cut costs. This could mean finding cheaper property management services, reducing maintenance costs, or lowering utility expenses.
Refinance: If you can get a better interest rate on your mortgage, refinancing can lower your monthly payments and increase your cash flow.
Improve Property: Making improvements to your property can justify higher rent and attract more tenants, reducing vacancy rates.
Negotiate Better Deals: When buying a property, negotiating a lower purchase price or better financing terms can reduce your total cash invested, improving your CoC return.
Cash-on-Cash Return is a valuable metric for real estate investors.
It helps you understand how well your investment is performing by comparing the annual cash flow to the cash you put into the property. By using this metric, you can make more informed decisions and improve the profitability of your investments.
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