Cash on Cash & Mortgage question

2 Replies

When you have a private funder and you are paying cash on your property.   How do you calculate the  Cash on Cash Return ( annual CF / down-payment)?  Its paid off with cash so there is no down payment correct? 

Also,  there is no Mortgage payment correct?  

Hi @Alisha Decoteau

You can still calculate your COCR even if you are paying all cash. COCR is simply your ratio of annual cash flow to the amount of money invested. So for example, if the property costs $100K and rents for $1500/month and you don't leverage, your COCR: annual cash flow (let's say $9000 for arguments' sake i.e. $1500*12-expenses (50%))/amount of money invested ($100K). You're COCR in this case is ~9%. If you leverage it will definitely be more.

If you are paying all cash then there is no loan so no mortgage.

Although you're not dealing with a bank, you still have a mortgage/note with whomever is providing that cash, unless it's yourself. Similarly, whoever is providing you that private money will likely want some sort of down payments. Their reasoning is the same as a bank... they want to see that you have skin in the game. If you have nothing to lose then defaulting on that loan won't be as big a deal.

Cash on cash calculation has no bearing on where you get that money from. Basically it's a calculation of return on the amount of money you have invested, whether that is down payment to a bank or to a private lender. If you have 100% financing then technically it's infinite returns. Infinite returns sounds cool but is pretty much a useless number (if I gave you 1 cent for free, that's an infinite return) without also knowing what your net cash flow is.

If you want to dive a bit deeper and factor in the time value of money then you'll want to use IRR as a measure of your return.

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