Cash on Cash Return Calculator

Cash-on-Cash Return

Cash-on-cash return is a useful metric in evaluating the profitability of a commercial real estate investment. Use our calculator above, and read on for more information about this important figure.

How to Use the Cash-on-Cash Return Calculator

The calculator takes four figures: the annual income of the property, its annual operating expenses, the annual mortgage payments, and the total cash invested. The expected first year of annual income of the target property must be carefully determined prior to using the calculator: This figure should include rental income, parking, other due payments, and so on. Once that figure is determined, the annual operating expenses of the property should be summed up as well. Operating expenses should include:

• Property taxes

• Property and liability insurance

• Utilities the owner pays

• Property management fees

• Repairs, maintenance, and unit turnover

• Payroll, marketing, and administrative costs

• Replacement reserve deposits

Two things do not belong in that figure. Loan interest is debt service, and it is already counted in the mortgage payments field. Down payment, closing costs, and up-front repair or rehabilitation spending are capital rather than operating costs, and they belong in total cash invested.

With annual income, operating expenses, mortgage payments, and total cash invested in hand, your cash-on-cash return is found by inputting those figures into the cash-on-cash return calculator.

Cash-on-Cash Return Formula

Cash-on-Cash Return = Annual Before-Tax Cash Flow ÷ Total Cash invested

A relatively simple calculation, an investor can find out their cash-on-cash return by taking the pre-tax cash flow (determined using the income and expense calculations for a property) and dividing that figure by the total amount of cash invested. The resulting figure is the cash-on-cash return.

Understanding Your Cash-on-Cash Return

Understanding the cash-on-cash return metric is incredibly useful to any commercial real estate investor. First and foremost, cash-on-cash return helps evaluate the profitability of a potential investment.

It’s beneficial to remember that the calculation does have some limitations. For example, properties undergoing extensive and lengthy renovations or rehabilitations can lead to significant challenges when doing the calculations. Additionally, expenses like down payments, closing costs, and even the compensation of contractors are typically made at various times throughout the acquisition and ownership of an apartment property.

Some other potential variables that can affect the cash-on-cash return include:

- Borrower Tax Profile

- Appreciation or depreciation of the property

- Associated risk with the rental property

- Interest

Cash-on-Cash Return (CoC) vs. Return on Investment (ROI)

The cash-on-cash return is almost always compared to the return on investment metric. The key difference between cash-on-cash return and ROI is the inclusion of debt. The calculation of cash-on-cash return exclusively determines the profits relative to paid investment costs. ROI calculations takes loans, appreciation, tax benefits, and many more variables into account, which may make it less relevant for the purposes of comparing commercial property investments.