{"id":78447,"date":"2020-08-22T10:00:03","date_gmt":"2020-08-22T16:00:03","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=78447"},"modified":"2023-05-22T13:45:03","modified_gmt":"2023-05-22T19:45:03","slug":"cash-on-cash-return","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/cash-on-cash-return","title":{"rendered":"What Is Cash-On-Cash Return &amp; How To Calculate It"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC4377442966&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p>Cash-on-cash return is one of the most important return on investment (ROI) measurements in real estate. Fortunately, it\u2019s also very easy to understand. Quite simply, a cash-on-cash return is the amount of income made on a property annually in relation to the amount invested into the same property, usually through mortgage payments.&nbsp;<\/p>\n\n\n\n<p>Cash-on-cash return is also understood as the cash flow rate on a real estate investment, that is, the amount of pre-tax income on an investment vs. the amount invested the same year. Cash-on-cash return rates are often used as a tool for forecasting real estate income and expenses. Cash-on-cash returns are measured in percentages.&nbsp; &nbsp;<\/p>\n\n\n\n<p><strong><em>Related:<\/em><\/strong><a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-metrics\" rel=\"noreferrer noopener\"><strong><em>&nbsp;<\/em><\/strong><em>The Top 8 Real Estate Calculations Every Investor Should Memorize<\/em><\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What is Cash-On-Cash Return?<\/h2>\n\n\n\n<p>Cash-on-cash return is the rate at which cash income is made on a real estate investment. It\u2019s calculated in percentages and is used as a tool to calculate annual earnings (cash flow) on a property investment. In evaluating the cash-on-cash return, annual cash flow plays a pivotal role.Working out the cash-on-cash return ratio (CRR) is often recommended by real estate experts as a way to decide whether a real estate investment is worth it. The CRR can indeed help you figure out the long-term performance of a property investment, but, as we\u2019ll see, it\u2019s not the only tool you should use for an accurate prediction of your ROI.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How to Calculate Cash-on-Cash Return<\/h2>\n\n\n\n<p>Learning how to&nbsp;<a href=\"https:\/\/www.biggerpockets.com\/blog\/2014-09-29-the-ultimate-analysis-cash-on-cash-return-vs-overall-return\" target=\"_blank\" rel=\"noreferrer noopener\">calculate cash-on-cash return<\/a>&nbsp;is simple. We simply divide the received net cash flow for the year by the amount of cash invested.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"452\" height=\"71\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/01\/CoC-Formula.webp\" alt=\"cash-on-cash return formula\" class=\"wp-image-146463\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/01\/CoC-Formula.webp 452w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/01\/CoC-Formula-300x47.webp 300w\" sizes=\"auto, (max-width: 452px) 100vw, 452px\" \/><\/figure>\n\n\n\n<p>Not too bad, right? However, it&#8217;s the variable annual pre-tax cash flow, and actual cash invested that can be tricky.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Understanding annual pre-tax cash flow<\/h3>\n\n\n\n<p>Calculate your annual pre-tax cash by adding together the following:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Gross scheduled rent<\/strong>: The property&#8217;s gross rents multiplied by 12. This reflects the maximum amount of income you can expect to receive.<\/li>\n\n\n\n<li><strong>Any other income<\/strong>: Think about all of the other earning opportunities the property may present. Will you allow pets and receive pet income and non-refundable deposits? Do you have parking spaces available? Do you get reimbursed for utilities or charge a flat rate regarding such?<\/li>\n<\/ul>\n\n\n\n<p>Then, subtract:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Actual vacancy<\/strong>: If you already own the property and want to produce the cash-on-cash return to understand your property\u2019s performance, you will want to use actual vacancy here. The actual vacancy should be measured by the number of days your property was vacant multiplied by the daily rental rate. Otherwise, use&nbsp;<em>potential<\/em>&nbsp;vacancy \u2014 which should always be a conservative number. Multiply your vacancy rate by the gross scheduled rent.<\/li>\n\n\n\n<li><strong>Operating expenses<\/strong>: This ranges from insurance, taxes, maintenance, HOA and bank fees, property management, and repairs.<\/li>\n\n\n\n<li><strong>Annual debt service<\/strong>: For the purposes of learning how to calculate cash-on-cash return, this number will be your monthly payment to cover both principal and interest related to your loan. This does not include insurance and taxes.<\/li>\n<\/ul>\n\n\n\n<p><strong><em>Related:<\/em><\/strong><a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/2015-01-29-investors-focus-cashflow-over-equity?itm_source=ibl&amp;itm_medium=related&amp;itm_campaign=opt\" rel=\"noreferrer noopener\"><strong><em>&nbsp;<\/em><\/strong><em>Cash Flow vs. Equity: Which Pays Off for Investors in the Long Run?<\/em><\/a><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Calculating actual cash invested<\/h3>\n\n\n\n<p>Now let\u2019s calculate the actual cash invested. Combine these numbers:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Down payment<\/strong>: Simply the amount of money you pay to obtain the property.<\/li>\n\n\n\n<li><strong>Closing costs<\/strong>: Add up your&nbsp;<em>net<\/em>&nbsp;closing costs associated with obtaining the property. To do this, add up all of the costs you paid (not including your down payment) and then subtract from that any seller or lender credits given to you.<\/li>\n\n\n\n<li><strong>Pre-rental improvements and repairs<\/strong>: Pre-rental improvements and repairs include anything you pay out-of-pocket to fix prior to renting the units out. (This is the part where the cash-on-cash return metric loses some value \u2014 it doesn\u2019t do a good job of analyzing returns when you are injecting more cash into the asset after renting out the property).<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Example of calculating cash-on-cash return<\/h3>\n\n\n\n<p>Let\u2019s take a simple example: you have invested $1,000,000 in a property with an annual pre-tax cash flow of $100,000. Now let\u2019s apply the formula for working out the cash-on-cash return to these numbers:<\/p>\n\n\n\n<p>100,000 \/ 1,000,000 = 10.00%&nbsp;&nbsp;<\/p>\n\n\n\n<p>That\u2019s it. Your cash-on-cash return is 10%.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What is a Good Cash-on-Cash Return Rate?<\/h2>\n\n\n\n<p>What is considered a &#8220;good&#8221; cash-on-cash return rate always depends on local housing market conditions. Real estate investors often utilize cash on cash calculations to assess the performance of their investments.In general, a rate of 8-12% is considered good by both real estate investors. However, in challenging real estate markets, a rate of 5-7% is considered to be acceptable. By contrast, in hot housing markets, a real estate investor might choose not to consider investment properties unless they will deliver a cash-on-cash return rate of at least 15%.\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Cash-on-Cash Return vs. ROI \u2014 What\u2019s the Difference?<\/h2>\n\n\n\n<p>Sometimes you\u2019ll see the terms &#8220;cash-on-cash return&#8221; and &#8220;return on investment&#8221; used interchangeably, but they\u2019re not actually the same. An ROI, or return on investment, refers to the rate of return on the total amount invested in a property, which includes the cash invested. What\u2019s meant by &#8220;cash&#8221; here is the equity held in the property. There are other elements of a real estate investment that contribute to the ROI, such as any renovations undertaken. Cash-on-cash return refers strictly to the rate of cash return on the cash invested on the mortgage of the property.\u00a0Evaluating the cash yield as well as the <a href=\"https:\/\/www.biggerpockets.com\/blog\/net-operating-income\" target=\"_blank\" rel=\"noreferrer noopener\">net operating income<\/a> can help determine the profitability of your potential investment property.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Why Cash-on-Cash Return Is a Bad Metric<\/h2>\n\n\n\n<p>Despite the fact that this metric provides an effective back-of-the-napkin calculation, investors shouldn&#8217;t rely on this number.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. It doesn&#8217;t indicate your actual return<\/h3>\n\n\n\n<p>Did you really think you were going to get through an entire article \u2014 written by a CPA \u2014 without discussing taxes?<\/p>\n\n\n\n<p>Your unique tax situation significantly impacts your&nbsp;<em>actual&nbsp;<\/em>return on investment. However, some investors argue that your tax situation doesn\u2019t impact the&nbsp;<em>asset\u2019s<\/em>&nbsp;performance \u2014 it is independent of you. They believe taxes should not be taken into account.<\/p>\n\n\n\n<p>However, the tax impact of investment decisions should absolutely be assessed. Your tax situation may not impact the asset\u2019s performance, but the asset\u2019s performance directly or indirectly impacts your tax situation, and that affects your returns.<\/p>\n\n\n\n<p>Let\u2019s say your annual pre-tax cash flow is $10,000, and you have invested $100,000. That&#8217;s a 10% cash-on-cash return. However, if you are in the 25% tax bracket, your after-tax cash flow is $7,500 \u2014 a 7.5% actual return.<\/p>\n\n\n\n<p>Further, we have to consider depreciation and amortization. In the example above, if your depreciation and amortization amount to $8,000 annually, then only $2,000 of the cash flow will be taxed, making our tax liability $500, assuming the same 25% rate. Since depreciation and amortization are \u201cphantom\u201d expenses, our after-tax cash flow is $9,500, resulting in a 9.5% actual return.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. It doesn&#8217;t account for equity<\/h3>\n\n\n\n<p>Yet another wrinkle: This metric doesn\u2019t take into account the equity added from the principal portion of your loan payment. That means it also assumes the entire mortgage payment is an expense. However, the principal portion of your loan payment can&#8217;t be expensed for tax purposes.<\/p>\n\n\n\n<p>As you can see, because the cash-on-cash return uses pre-tax numbers and doesn\u2019t account for principal payments, the return suggested should not be trusted.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. Additional limitations<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Cash-on-cash return doesn\u2019t take appreciation into account<\/strong>. That&#8217;s why cash-on-cash return is best used for value investing, not speculation. Depending on how you invest, this could be a good or bad thing.<\/li>\n\n\n\n<li><strong>It ignores the risk associated with investments.<\/strong><\/li>\n\n\n\n<li><strong>This metric doesn\u2019t take opportunity costs into account<\/strong>, which more sophisticated investors will find alarming.<\/li>\n<\/ul>\n\n\n\n<p><strong>It also ignores the effect of compounding interest<\/strong>. Cash-on-cash return may make short-term investments look more appealing and make longer-term investments with a lower cash-on-cash return unappealing. But someone interested in an investment that compounds or appreciates may be better off taking the investment with a (currently) smaller cash-on-cash return.<\/p>\n\n\n\n<p><em>Related:&nbsp;<\/em><a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/dont-base-your-buying-decisions-on-coc\" rel=\"noreferrer noopener\"><em>Don\u2019t base your buying decisions on cash-on-cash returns alone<\/em><\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">When Investors Should Calculate Cash-on-Cash Return<\/h2>\n\n\n\n<p>Much of the real estate industry, including investors and agents, use cash-on-cash returns. Why? Because of the metric\u2019s simplicity. Here are some times you should calculate this percentage.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. If you&#8217;re determining how much financing to use<\/h3>\n\n\n\n<p>This number specifically drills down to the return on the capital invested. It only considers returns that are driven by the property\u2019s net cash flow and doesn&#8217;t take asset appreciation into account.<\/p>\n\n\n\n<p>Because cash-on-cash return only compares net cash to the actual cash invested, it\u2019s a great way to assess the effect of leverage so you can measure different levels of financing. Using leverage decreases your cash-on-cash return.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. If you&#8217;re looking for a simple rule of thumb<\/h3>\n\n\n\n<p>Many investors are not sophisticated enough to use things like the&nbsp;<a target=\"_blank\" href=\"https:\/\/www.biggerpockets.com\/blog\/internal-rate-return-irr\" rel=\"noreferrer noopener\">internal rate of return (IRR)<\/a>&nbsp;or&nbsp;<a target=\"_blank\" href=\"https:\/\/corporatefinanceinstitute.com\/resources\/valuation\/modified-internal-rate-of-return-mirr\/\" rel=\"noreferrer noopener\">modified internal rate of return (MIRR)<\/a>. These two metrics can be difficult to learn and understand. Yes, they provide more insight \u2014 but also require more work.<\/p>\n\n\n\n<p>It\u2019s easy to understand how to calculate cash-on-cash returns. It\u2019s simply the physical cash you have in hand after 12 months, divided by the physical cash you\u2019ve invested. Because of that simplicity, it\u2019s also a great way to run a \u201cback of the napkin\u201d analysis, which I personally use to screen potential deals quickly. The calculation takes 10 minutes or less and typically gets you within 2% &#8211; 5% of the actual return on equity.<\/p>\n\n\n\n<p>If you\u2019re analyzing hundreds of deals a week, something like this makes a lot of sense.<\/p>\n\n\n\n<p>However, if you want more accurate results, use other metrics to supplement the information that the cash-on-cash return provides \u2014 specifically, the IRR and MIRR. While these two metrics require a bit more work, they also offer more insight into the property&#8217;s performance.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. If you&#8217;re comparing multiple investments<\/h3>\n\n\n\n<p>Cash-on-cash return also allows you to compare different investments easily. You can compare rental property to lending, determine whether you should invest in stocks or bonds, or if you should start a business. Granted, it doesn&#8217;t consider risk factors, but the cash-on-cash return does allow for a universal comparison between different investments.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">4. If you\u2019re in your first year of investing<\/h3>\n\n\n\n<p>Cash-on-cash return can be a useful tool to evaluate or project the property&#8217;s first-year performance. After that, the cash-on-cash return begins to lose value because your denominator \u2014 the actual cash invested \u2014 will constantly change as you pay down the loan and make improvements and repairs. In this situation, I recommend using IRR.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p>While the cash-on-cash return certainly has weaknesses, it\u2019s a great metric for value investors and serves as a solid screening tool. Using it in tandem with other metrics will give you plenty of information to place an offer on a property. By incorporating cash on cash calculations, analyzing the cash yield, and net operating income, investors can make informed decisions.<\/p>\n\n\n\n<p><em>How often do you use the cash-on-cash return formula when evaluating properties?<\/em><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_64dd5ab97ed79\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_62df1a82bfc88\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-slate-900-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-large-font-size\"><strong>Analyze Deals Like a Pro<\/strong><\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Deal analysis is one of the first and most critical steps of real estate investing. Maximize your confidence in each deal with this first-ever ultimate guide to deal analysis. <em>Real Estate by the Numbers<\/em> makes real estate math easy, and makes real estate success inevitable. <\/p>\n\n\n\n<div id=button-custom-event-block_64138224164cd class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/real-estate-by-the-numbers?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: REBTN Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/cash-on-cash-return&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n\n\n<div id=button-custom-event-block_641381f7164cc class='button-custom-event'>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/REBN_cover_mockup_01-e1679000020543.png\" alt=\"real estate by the numbers\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/cash-on-cash-return&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Real estate investors can use cash-on-cash return to quickly evaluate a property&#8217;s potential. However, this metric still has flaws. Learn more here.<\/p>\n","protected":false},"author":9994,"featured_media":147746,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4252],"tags":[7042],"class_list":["post-78447","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-deal-analysis","tag-seo-optimization"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/78447","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/9994"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=78447"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/78447\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/147746"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=78447"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=78447"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=78447"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}