How do you determine Cash on Cash ROI?

General Real Estate Investing
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How do you determine Cash on Cash ROI?

Seth Mosley
Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes

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!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
11y

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%

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    11y

    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.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

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

    0Reply
  • Victor Eng
    Real Estate Investor · Wakefield, MA · Member since 2014 · 54 posts · 34 votes
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    (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%.
    0Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    11y

    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.

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  • Nate Garrett
    Property Manager · Tulsa, OK · Member since 2008 · 186 posts · 208 votes
    11y

    @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.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    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%

    3Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y

    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

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  • Seth Mosley
    OP
    Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y

    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?

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    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.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
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    Originally posted by @Account Closed:
    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

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @J Scott:
    Originally posted by @Account Closed:
    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.

    0Reply
  • Derek Carroll
    Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
    11y
    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.
    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    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.

    0Reply
  • Derek Carroll
    Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
    11y
    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.
    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    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.

    0Reply
  • Derek Carroll
    Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
    11y
    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.
    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    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? 

    0Reply
  • Derek Carroll
    Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
    11y
    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.
    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    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.

    0Reply
  • Seth Mosley
    OP
    Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y

    The original title of the post: 

    How do you determine Cash on Cash ROI?

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y

    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.

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  • Seth Mosley
    OP
    Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y

    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 :)

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    11y
    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...

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    0Reply
  • Guy M.
    Flipper/Rehabber · Williamsburg, VA · Member since 2008 · 143 posts · 105 votes
    11y
    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.

    0Reply
  • Seth Mosley
    OP
    Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
    11y

    This turned into an interesting discussion - i was just trying to verify that my methods of figuring up my ROI percentages are in fact a good way of doing it and I'm not crazy :)

    1Reply
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