CoCROI based on free or total cashflow?

Question

When people (or you!) calculate the Cash on Cash Return On Investment (CoCROI) to compare the profitability of a real estate investment and compare that to other investment options, should it be based on the free cashflow (income - expenses, not including mortgage payments) or the total cashflow (income - expenses, including mortgage payments)?

I thought that when referring to CoCROI one was not supposed to include the mortgage payment but I've seen people such as Brandon do it when comparing an investment to the stock market in one of his YouTube videos.

Thanks!

Joe Villeneuve · Answer

CoCR includes the mortgage payment.

You're confusing CoCR with the CAP rate which does NOT include the mortgage payment...and is only used for commercial properties.

Keep in mind that both CoCR and CAP Rate are only applied the first year of the corresponding investments.

Jim Pellerin · Answer

Cash on cash is how much you are going to put in your pocket after you have paid everything. But it's not a good caparison for other types of investments because it doesn't take into account appreciation, forced equity and principal pay down.

Sheldon Zimmerman · Answer

I think this really depends on what you are trying to figure out. If you want to know how much cash on cash you will get at the end of the year. I think it is very important to add the mortgage in the numbers. Because that will give you a true evaluation of how much the home will cost you. But if you are buying the property with all cash then you don't need a mortgage number in it. Hopefully, that helps.

Jónas Tryggvi Stefánsson · Answer

Thanks for clarifying guys. Much appreciated.

Brady Morgan · Answer

CoC return is after all expenses and debt service.

NOI is the calculation before subtracting debt service.

NOI - Debt Service = Cash on Cash return.

CoCROI based on free or total cashflow?

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