How do you determine Cash on Cash ROI?

29 Replies

I know how i do it, just interested to know how alot of you come to your percentage on here.

I see some pretty high percentages, and wonder if you guys are factoring in the same numbers as I am in my equations (rent minus repairs / piti / vacancy/turnover / capital expenses / property management / lawncare/maintenance)

Interested to see responses..

Thanks and happy new year!

Most people simply use the 50% rule and then subtract out P&I for a quick analysis.  Big numbers are a result of either buying distressed properties or buying in C/D class areas that have high rent to price ratios (2% or above).

A 2% property has a very nice cash on cash given a 25% down payment.

Cash in divided by cash out = CCR%. Only use the numbers for the 1st year.

(Annual Gross Rent - OPEX - Debt Service ) / (Entry Equity + Remodeling Costs)

If top part is 15,000 and bottom is 75,000, then your annual CoC is 20%.

To finish my thought... given the low interest rates now, you get insane leveraged CoC returns... a 25% down payment @ 4.5% for 30 years on a 2% house is a 30% CoC return.

@Seth Mosley  

It should be calculated:

CoC% = (All cash inflows - All cash outflows) / Total Initial Cash Investment

I've always enjoyed this article by John Reed. I think that he should update his article to include the positive impact that low interest rates can have on cash flow, but overall, I agree with his premise: there are a large percentage of single family investors that drastically overestimate their returns.

That doesn't mean real estate isn't a good investment. It just isn't the get-rich-overnight-silver-bullet that many want to believe it is.

Cash on cash return means exactly what the words mean...within the first year.  It isn't that complex.  It's a percentage of how much CASH you got back related to how much CASH you put in.

If I buy a property worth $100,000, for $80,000, with 20% down ($16,000) and I finance the rest ($60,000), I'm putting $16,000 in CASH in.

If within the first year, with the same house, I get $300/month NCF back, or $3600 in that first year, my CCR is $3600/$16,000 = 22.5%.

If, added to this, I rent a parking space for $25/month, and I have no expenses to offset this CASH income, my CASH income is now $3900/month...so my CCR is:
$3900/$16,000 = 24.375%.

If, during the year I have to pay cash for a furnace ($1000), my CASH income in that 1st year is now $2900, so the CCR is: $2900/$16000 = 18.125%

If, I paid the full AP of $80,000 in CASH, got the $3600/yr in NCF, and I refinanced and got all of my CASH I used to buy the property back, my CASH coming back would be $83,600 so my CCR would be: $83,600/$80,000 = 104.5%...as in I got all of my money back, plus an additional 4.5%

Good answers above, but a couple minor things I might articulate differently...here's how I would sum it up (and given that I happened to be looking at Frank Gallinelli's book earlier this week, I can say this is how he sums it up as well):

Cash-on-Cash Return = Annual Cash Flow Before Taxes / Cash Invested

Annual Cash Flow Before Taxes = NOI - CapEx - Debt Service

Cash Invested = Cash Out of Pocket for Acquisition + Rehab Costs

Interesting and sobering article - not sure I agree, that cashflow is not a possibility, id be interested to hear some pros responses to this article. I understand that real estate is not a get rich overnight thing, but I don't know that you can't make monthly cashflow on it.

my experience so far has only been positive.

Thoughts anyone?

Originally posted by @J Scott:

Good answers above, but a couple minor things I might articulate differently...here's how I would sum it up

Annual Cash Flow Before Taxes = NOI - CapEx - Debt Service

Cash Invested = Cash Out of Pocket for Acquisition + Rehab Costs

You do not subtract CapEx & Debt Service from NOI.

Originally posted by @Bob Bowling:
Originally posted by @J Scott:

Good answers above, but a couple minor things I might articulate differently...here's how I would sum it up

Annual Cash Flow Before Taxes = NOI - CapEx - Debt Service

Cash Invested = Cash Out of Pocket for Acquisition + Rehab Costs

You do not subtract CapEx & Debt Service from NOI.

You are absolutely incorrect.

As I -- and every other person in this thread -- has indicated, cash flow is all cash in and cash out on the property, and that includes capex and debt service.

I'm embarrassed for you, Bob...anyone who has ever purchased an investment property should know the definition of cash flow.

Spend 10 seconds typing "cash flow" into your preferred search engine and click on the first definition...here's my first click:

http://www.entrepreneur.com/encyclopedia/cash-flow

Originally posted by @J Scott:
Originally posted by @Bob Bowling:
Originally posted by @J Scott:

Good answers above, but a couple minor things I might articulate differently...here's how I would sum it up

Annual Cash Flow Before Taxes = NOI - CapEx - Debt Service

Cash Invested = Cash Out of Pocket for Acquisition + Rehab Costs

You do not subtract CapEx & Debt Service from NOI.

You are absolutely incorrect.

As I -- and every other person in this thread -- has indicated, cash flow is all cash in and cash out on the property, and that includes capex and debt service.

I'm embarrassed for you, Bob...anyone who has ever purchased an investment property should know the definition of cash flow.

Spend 10 seconds typing "cash flow" into your preferred search engine and click on the first definition...here's my first click:

http://www.entrepreneur.com/encyclopedia/cash-flow

@J Scott stated, 

Annual Cash Flow Before Taxes = NOI - CapEx - Debt Service

Don't be embarrassed for me. I am not the one that made the ignorant statement that you subtract CapEx and debt service from NOI. Is your book this flawed with incorrect information?

Spend 10 seconds, well maybe 20 for you, and type algebraic formulas and click on ALL the definitions until you understand.

Bob Bowling read J Scott 's formula again. While you are correct that debt service and capex is not taken out of cash flow to determine NOI, the question is how to calculate cash on cash return which does in fact take both into account.

The question and the formula presented do not suggest a method for calculating NOI but rather show how a cash flow metric is derived.

Originally posted by @Derek Carroll :

Bob Bowling read J Scott 's formula again. While you are correct that debt service and capex is not taken out of cash flow to determine NOI, the question is how to calculate cash on cash return which does in fact take both into account.

The question and the formula presented do not suggest a method for calculating NOI but rather show how a cash flow metric is derived.

YOU read it again and tell me what it says.

Also, people should recognize that different metrics are used depending on whether you are looking at the numbers for internal accounting or for external tax reporting, which is why there may be some confusion between all of these numbers.

Originally posted by @Derek Carroll :

you are correct that debt service and capex is not taken out of cash flow to determine NOI,

the formula presented do not suggest a method for calculating NOI but rather show how a cash flow metric is derived.

Don't even get me started on @J Scott 's NOI calculating. He has a whole blog with incorrect information.

Bob Bowling

I see the following: cash flow before taxes equals net operating income, less capital expenditures less debt service.

Please tell me what you see as incorrect there.

Originally posted by @Derek Carroll :

Bob Bowling

I see the following: cash flow before taxes equals net operating income, less capital expenditures less debt service.

Please tell me what you see as incorrect there.

Seriously? 

Bob Bowling yes

http://realestate.about.com/od/knowthemath/ht/cashflow_before.htm

We are not discussing how to calculate NOI, which is what you seem to be hung up on.

Originally posted by @Derek Carroll :

Bob Bowling yes

http://realestate.about.com/od/knowthemath/ht/cashflow_before.htm

We are not discussing how to calculate NOI, which is what you seem to be hung up on.

How did YOU JUMP to that conclusion?  Reread the posts.  You'll eventually see where you've gone off track.

The original title of the post: 

How do you determine Cash on Cash ROI?

Bob -

Both Derek and I posted linked to reasonable sources that verify that what everyone else (but you) is saying is correct.  In fact, Derek's link provided an equation almost identical to the one I provided.  

You seem to think everyone is incorrect, but you provide no source to support what you believe.  In fact, you have provided no information whatsoever other than to say everyone else in this thread is wrong.

So, let's see a reasonable source that says cash flow doesn't factor in capex and debt service.

Being conservative on my end, I would tend to agree that cashflow would be figured by adding in capex and debt service - at least my bank accounts would agree with that much :)

Originally posted by @Seth Mosley :

Being conservative on my end, I would tend to agree that cashflow would be figured by adding in capex and debt service - at least my bank accounts would agree with that much :)

It's not even a question...

Originally posted by @Joe Villeneuve :

Cash on cash return means exactly what the words mean...within the first year.  It isn't that complex.  It's a percentage of how much CASH you got back related to how much CASH you put in.

If I buy a property worth $100,000, for $80,000, with 20% down ($16,000) and I finance the rest ($60,000), I'm putting $16,000 in CASH in.

If within the first year, with the same house, I get $300/month NCF back, or $3600 in that first year, my CCR is $3600/$16,000 = 22.5%.

If, added to this, I rent a parking space for $25/month, and I have no expenses to offset this CASH income, my CASH income is now $3900/month...so my CCR is:
$3900/$16,000 = 24.375%.

If, during the year I have to pay cash for a furnace ($1000), my CASH income in that 1st year is now $2900, so the CCR is: $2900/$16000 = 18.125%

If, I paid the full AP of $80,000 in CASH, got the $3600/yr in NCF, and I refinanced and got all of my CASH I used to buy the property back, my CASH coming back would be $83,600 so my CCR would be: $83,600/$80,000 = 104.5%...as in I got all of my money back, plus an additional 4.5%

 I like this example.

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