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Cash-on-cash return is a critical metric that measures the annual return on the actual cash invested in a property. Unlike ROI, it focuses only on your cash investment.
CoC Return = (Annual Cash Flow / Total Cash Invested) × 100
Cash-on-cash return measures the annual return on the actual cash invested in a property. It's calculated as (Annual Cash Flow / Total Cash Invested) × 100. This metric is especially useful for financed purchases as it shows the return on your down payment and closing costs, not the full purchase price.
A good cash-on-cash return typically ranges from 8% to 15% or higher, depending on your investment strategy and risk tolerance. Conservative investors may target 8-10%, while aggressive investors may seek 15%+. Compare to alternative investments like stocks or bonds to determine if the return justifies the risk.
Cap rate measures return based on the full purchase price and excludes financing costs. Cash-on-cash return measures return based on actual cash invested (down payment + closing costs) and includes financing costs. Cash-on-cash is more relevant for leveraged investments.
Cash-on-cash return helps you evaluate leveraged investments and compare properties with different financing structures. It shows the actual return on your cash, allowing you to maximize returns by using leverage effectively.
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