When doing a 1031 Exchange, how do I calculate CoC Return

2 Replies

If Cash on Cash Return is...

CoCR = (Rent - Operating Expenses - Loan Payments) / (Down Payment + Closing Costs + Renovations)

And I'm using a 1031 Exchange to upgrade from one property to the next, does that mean my Down Payment is 0 if nothing comes out-of-pocket for this property? What if I use the loan to handle renovations, so it goes into my loan payments, does that just mean I increase the Loan Payments section and Renovations = 0 as well?

Whatever cash is going into the deal. You may not be putting in more cash, but a third party is holding cash for you and then investing it where you direct them to. The amount of cash they invest for you will be your basis for cash on cash return. 

Don't think if it as a formula (this advice is coming from a math nerd). Cash in vs cash out on the project. 

@Adam Conrad , the cash in the 1031 exchange is your down payment and needs to be counted to accurately gauge your CoC return.

Be careful before you go to far down the road of using loan proceeds to fund improvements.  Unless you're doing a specialized improvement exchange your QI cannot let you use exchange proceeds to fund improvements to property you buy.  To do that ends up with cash coming to you in the form of loan debt which although you use in improvements is looked at as boot and taxable to the IRS.

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