Tax & Insurance in Cash on Cash Return

Member since 2025 · 2 posts · 1 vote

Hey Folks,

I've just closed on my very first purchase of a rental property. It's essentially a BRRRR, just not an extensive one. In the refinance portion of the process, do you calculate the escrowed taxes and insurance into your cash on cash return calculations? The PITI is already factoring those monthly costs, but the lender requires a full year of taxes escrowed and insurance paid. Even though that's technically money I'm invested in the deal, I feel like it shouldn't be calculated into the CoC equation. Isn't that doubling up the same figures which skews the %?

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Jimmy LieuBusiness Member
Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
6mo
Quote from @Brandon Causey:

Hey Folks,
I've just closed on my very first purchase of a rental property. It's essentially a BRRRR, just not an extensive one. In the refinance portion of the process, do you calculate the escrowed taxes and insurance into your cash on cash return calculations? The PITI is already factoring those monthly costs, but the lender requires a full year of taxes escrowed and insurance paid. Even though that's technically money I'm invested in the deal, I feel like it shouldn't be calculated into the CoC equation. Isn't that doubling up the same figures which skews the %?
Congrats on the first rental, Brandon! A lot of people handle this differently, but personally I would include the escrowed taxes and prepaid insurance in the total cash invested if that money had to come out of your pocket to close/refi the deal. That said, you’re correct that you do not want to “double count” it on the expense side if your PITI already includes those monthly escrows in your cash flow calculations. The escrow balance itself is still your money tied up in the deal, so from a true cash invested standpoint, many investors include it in the denominator for CoC return, even if it slightly lowers the percentage. Others leave it out since it’s technically still your asset sitting in escrow and not a sunk cost. The important thing is consistency across all your deal analyses so you’re comparing apples to apples.
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Alan AsriantsBusiness Member
Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
6mo
It is normal practice to have the insurance paid in full at settlment for the year along with prorated RE taxes. Your escrow account build up is also part of your closing costs, but in theory this is "your money" - if you sell your home tomorrow and there is money in escrow, it will be returned to you
It works like a piggybank to add up throughout the year and then when its time to pay for taxes or insurance you will have funds in there that the bank uses.
In your total "cash invested" you can use this as part of your COC calculations since it is technically a closing cost
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G. Brian DavisPro Member
Investor · Hatboro, PA · Member since 2016 · 3k+ posts · 903 votes
6mo
You're correct. If taxes and insurance are already in your PITI, don't count them again as expenses or you'll double count them. Most investors still include escrow funding as part of total cash invested though, since it's real money tied up in the deal.

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James JonesPro Member
Investor · Collierville, TN 38017 · Member since 2017 · 1k+ posts · 720 votes
6mo
Good question. This is where a lot of people accidentally distort their returns.

Do not double count.

There are two separate things happening:

Monthly taxes and insurance

These absolutely belong in your operating expenses because they affect cash flow.

Whether paid directly or through escrow, they reduce your monthly net income.

Escrow reserves collected at closing

That is cash you had to bring to the table.

But it is not an expense. It is a balance sheet asset that will be used to pay future taxes and insurance.

So here is how most experienced investors handle it:

Cash on Cash formula:

Annual Cash Flow

÷

Total Cash Invested

The key question is: what counts as “cash invested”?

You have two approaches:

Conservative approach

Include escrow reserves in total cash invested because it is capital tied up in the deal.

Practical operating approach

Exclude escrow reserves because:

• It is not permanently spent

• It will offset future tax/insurance payments

• You are already accounting for those costs in monthly expenses

What you do not want to do:

Count escrow in cash invested AND count full monthly taxes/insurance as expenses without recognizing that escrow is just pre-funding those same costs.

That is where skew happens.

Most seasoned BRRRR investors:

• Include actual down payment, closing costs, rehab cash

• Exclude escrow cushions from CoC

• Include taxes and insurance in operating expenses only

Because escrow is temporary float, not true deployed capital.

If you want the cleanest math:

Cash invested should reflect capital at risk long term.

Escrow reserves are not capital at risk. They are timing.

You’re thinking about it correctly.

If your lender stopped escrowing next year, your returns wouldn’t magically change. That tells you it’s a structure issue, not a performance issue.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 4k+ votes
6mo
Cash on Cash Return = Net Income / Cash Into the deal

I preferably do not like to include principal payments in the net income figure but some do.
I would not include depreciation in this figure either.

Cash in the deal = Earnest deposit + Cash to close

If you purchased a $400,000 house and paid $80,000(20%) + $5,000 closing costs your cash in the deal would be $85,000.

If you made $8,000 during the year(Gross rents - cash expenses), your cash on cash return would be 9.4%
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Garrett CrosbyPro Member
Real Estate Agent · Los Angeles, United States · Member since 2021 · 392 posts · 162 votes
5mo
James Jones nailed the math. The short version: don't double-count. Taxes and insurance belong in your monthly expenses (already in PITI), and whether or not the escrow reserves count in "cash invested" is really a preference call — most conservative analysts include it since it's capital tied up, but it's not a permanent sunk cost since it gets applied to future bills.
The bigger thing worth noting on a BRRRR specifically: CoC return becomes less meaningful the closer you get to pulling all your money back out in the refi. If you've got minimal cash left in the deal, your CoC looks enormous (or infinite if $0 left in). At that point most experienced investors are tracking actual dollars returned vs. invested, and whether the monthly cash flow covers the full debt service comfortably. The metric that matters most shifts when the capital recycling part of BRRRR is working correctly.
Congrats on deal #1. Feel free to reach out if you want to think through the next one.
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