CoC is used to determine the amount of profit you will make (yearly) based on the amount of cash you have invested in the property (not the amount borrowed). This is an important distinction (cash invested vs borrowed) as you are likely to be financing your properties, regardless of the investment type (flip, rental, etc).
Cash-on-Cash compares your net income to your initial investment.
The cash that you initially invest into a property typically includes your loan down payment, closing costs, and renovations.
Your income might include rent, parking income (if you charge extra for parking), coin laundry income, maybe you have a billboard on the roof that you generate income from.
Make it Net
Don’t forget to subtract your operating costs. This will include loan payments, HOA fees, property taxes, general maintenance, property management, groundskeeping, and insurance.
To figure out your cash on cash return, you would simply divide your net income by the initial investment.
What’s it for?
CoC is important for income-generating properties, typically rental properties, as it provides a metric of your income performance relative to the amount invested.
Also, in real estate investing, your return on investment is largely dependent on how you finance the property. Cash on Cash Return (CoC) will allow you to compare financing options and choose the option that gives you the best rate of return.
Stick with us! Stay Tuned~ Our next post will discuss the ever-important Cap-Rate for RE Investments.