Cash on cash return (CoC return) is a financial metric used to measure the profitability of a real estate investment. It is calculated by dividing the annual cash flow from a property by the total amount of cash invested. CoC return is a valuable metric for real estate investors because it allows them to compare the profitability of different investment properties.
To calculate Cash on Cash return, you will need to know the following:
Annual cash flow: This is the amount of cash the property generates yearly. It is calculated by subtracting all operating expenses from the property's gross income.
Total cash invested: This is the total amount of money that you invested in the property, including the purchase price, down payment, closing costs, and any renovations.
Once you have this information, you can calculate the CoC return using the following formula:
CoC return = Annual cash flow / Total cash invested * 100%
For example, if you purchase a property for $100,000, generating $12,000 in annual cash flow, your CoC return would be 12%.
CoC return is a valuable metric for real estate investors. Still, it is essential to note that it is not the only factor to consider when evaluating a potential investment property. Other factors to consider include the property's location, condition, and potential for appreciation.
Here are some tips for increasing the CoC return on your real estate investments:
Choose properties with a high rent-to-value ratio. This means the property's monthly rent is high relative to its purchase price.
Keep your operating expenses low. This can be done by negotiating good deals with vendors and completing minor repairs yourself.
Increase the property's value by making improvements. This could include updating the kitchen and bathrooms, adding a deck or patio, or finishing the basement.
Refinance the property to get a lower interest rate. This will free up more cash flow each month.
CoC return is an essential metric for real estate investors. Still, it is important to remember that it is not the only factor to consider when evaluating a potential investment property. By choosing suitable properties and managing them effectively, you can increase your CoC return and improve the profitability of your real estate investments.
References:
Cash on Cash Return - Definition, Formula, Examples (corporatefinanceinstitute.com)
Cash on Cash Return | Formula + Calculator (wallstreetprep.com)
What is cash-on-cash return and how much should you target? (roofstock.com)
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