Contents

There is a lot of jargon to wrap your head around as a real estate investor- especially in the rental property market. One of the terms you may have heard of is cash-on-cash return- but what does it mean, and how do you calculate it?

This comprehensive guide to using a cash-on-cash return calculator and how to apply it to your property has all the information you need.

What Is Cash-on-Cash Return?

The definition of cash-on-cash return is a lot simpler than you may think.

It means the annual yield earned on the actual cash you invested in a property. In other words, it is the percentage of your cash investment you make back in a year.

Actual cash investment can refer to several things- including the upfront deposit on a mortgage, another form of down payment, closing costs on the sale, repairs or renovations that were paid for out-of-pocket, and anything else relating to the property you have personally paid for rather than financed or covered with rental income.

In the rental property market, cash-on-cash return potential is based on the expected annual rental income value of a property compared to the amount a person is investing upfront. People use it as a way to see if a property is an attractive investment opportunity for them and their portfolio.

You often see this expressed as CoC return or CCR.

What Does a Cash-on-Cash Calculation Look Like?

The most common method used to calculate cash-on-cash return is to divide your net annual cash flow by the amount of your initial cash investment.

Net annual cash flow ÷ Initial cash investment = Cash yield (CoC return)

Let's say, for example, you have invested a total cash amount of $50,000. If your net annual cash flow through that property is $5,000, your calculation would look like this.

$5000 cash flow ÷ $50,000 cash invested = 10% cash-on-cash return

Another way some real estate investors prefer to calculate cash-on-cash return is by including the money they have paid toward their principal balance on their mortgage payments as part of their cash flow.

If this is the way you want to do it, the calculation is still fairly simple and looks like this.

(Net annual cash flow + Principal paydown) ÷ Initial cash investment = Cash yield (CoC return)

Using the same example numbers as shown above, let's assume they have paid back $500 of their principal mortgage balance. The new calculation would look like this.

($5000 cash flow + $500 principal balance = $5500) ÷ $50,000 cash invested = 11% cash-on-cash return

Understanding the Variables

Now that we have the simple calculation down- let's take a closer look at how each of the variables is worked out and what factors impact your calculations.

Cash Invested

Your initial investment is not the only thing you need to consider when establishing your out-of-pocket number. Another term used to describe this variable is equity- which just means how much money you have in a property.

Before you can work out what percentage of your investment you have earned back, you need to work out exactly what you have spent.

The down payment or deposit is generally the main expense, but you must also consider how much you have spent on repairs or renovations on the property that are not calculated as part of your annual expenses. Closing costs also come under this umbrella.

If you paid a $40,000 down payment for the property and $2,000 closing costs- then spent a further $8,000 of your own money on renovations before you could rent it out, your total cash invested would be $50,000.

Cash Flow

When we talk about cash flow in CoC return calculations, it means your net income over the year. Your annual net cash flow is worked out by taking your positive cash flow less your negative cash flow and is calculated pre-tax.

Let's take a closer look.

The first step in calculating cash flow is to work out the total amount of money it brings in. In the rental industry, that means how much you earn in rent each year. If you charge £1,500 per month in rent (assuming you have occupancy the entire year), the annual rental income is $18,000.

However, that is not your net annual pre-tax cash flow, and you need to consider your operating expenses.

There are several regular expenses in real estate investing, including property taxes, loan payments, property management fees, insurance costs, and general maintenance- to name a few.

You work out your property's net annual cash flow income by subtracting your total annual expenses from your gross annual income.

Here is an example of what it may look like trying to work out the cash yield for an investment property (using simple figures- yours may be very different).

Total rental income: $18,000

  • $700 annual insurance costs
  • $1,000 annual property taxes 
  • $8,000 annual mortgage payments
  • $1,800 annual property management costs
  • $1,500 annual maintenance and repair costs

Total operating expenses: $13,000

Net annual cash flow = $5,000

Principal Paydown

Some people choose to include the money they repay to the principal loan on their mortgage payment.

Your principal balance is the portion of your mortgage payments that go toward the actual loan for the purchase price of your property- rather than paying interest. How much you contribute to the principal gradually increases each month- but this is a whole other calculation!

Although it is technically an expense that comes off your annual earnings, people sometimes include this in their cash flow because it goes towards paying off your mortgage.

To find out how much you paid towards your principal, you need to look at your mortgage amortization schedule.

What Factors Affect Cash-on-Cash Calculations in Real Estate?

Your real estate cash-on-cash returns all come down to your monthly cash flow and how much you need to spend.

Here are a few of the things that can reduce your CoC return.

Vacancy Rate

The higher your vacancy rate is, the lower your rental income will be. If we are comparing income properties, those that have long-term, stable lease arrangements are in a better position to maximize their annual pre-tax income than those that are let out short-term or month-to-month.

If you experience more vacancy in a rental property than normal- your cash-on-cash return will be lower that year.

Unexpected Extra Expenses

Most property investors have an expected budget for repairs and renovations each year for general upkeep and maintenance. Sometimes, something comes up that costs a lot more than expected.

It may be covered by insurance, in which case your bottom line won't be affected (until the following year if your premium increases). If it isn't, then your cash flow will take a hit.

Where You Are in Your Mortgage Payments

Unless you have refinanced in some way, the longer you have been paying your mortgage, the more you pay back to the loan itself each month. If you are including your principal payments in your CoC calculation, your percentage will be significantly higher towards the end of your amortization schedule.

How to Leverage This Calculation in the Real Estate Investment and Rental Property Markets

One of the common questions people ask is when they should use a cash-on-cash calculator and how to utilize it in the property industry.

The most important thing to note is that CoC return is about cash yield over time, not one-off returns. If you are buying a property to flip and sell it, this is not the calculation you need. It is more suitable for investment property you intend to hold for at least a couple of years- but not long term.

Long-term investments need a more in-depth calculation to determine future returns, including appreciation and other factors.

Many people use it as a measure to compare potential investments. By looking at the expected rental income and estimated expenses, you can work out the CoC potential on multiple properties. From there, they can decide which is the most attractive investment.

CoC Return Calculator Compared to Other Calculations

Knowing when to utilize what calculation can seem complicated sometimes. It helps to understand the differences between some of the ones you see and hear about most often.

Where cash-on-cash returns are concerned, there are a few seemingly similar calculations. Here is a brief overview of the differences between them and how to leverage each one.

CoC VS ROI

ROI stands for return on investment. It also looks at the cash invested compared to the income earned, but it applies to the cumulative return over the entire holding- rather than the current period.

You use a cash-on-cash return calculator to establish what you could make back each year (or have made back in the previous year), but you use an ROI calculator to work out how much profit you have made (or will make) in total after you sell your property.

CoC VS Cap Rate

Cap rate is short for capitalization rate- and is also most commonly leveraged as a way to compare potential investments based on their earning potential.

Like CoC, the cap rate calculates what percentage of an investment you could earn back in a year, but it is based on the property's net operating income rather than cash yield. Net operating income is not affected in the same way as cash yield calculations by things like financing (mortgage payments).

Both show potential annual returns, but they take different approaches. Neither gives a full picture, and they are often used together when people are comparing potential investment properties.

What Is a Good Cash-on-Cash Return?

It is difficult to say what a good cash-on-cash return looks like, as it is different for each investor. The general consensus across the industry is that 8% is the minimum ideal annual yield for this calculation.

Depending on who you ask, the target bracket is 8-10% or 8-12% annual CoC return- unless you are talking about a longer-term investment property in a market that is expected to boom. In those cases, it may be okay to go with a lower figure in return for the appreciation potential.

Are There Any Limitations to Using a Cash-on-Cash Calculator?

While using a cash-on-cash return calculator is a simple and reliable way to establish your cash yield compared to investment, it doesn't give you a complete picture.

Yes- it is an effective method for comparing what you have spent and what you have earned at face value- but it does not account for appreciation in value and some other factors that real estate investors may be interested in.

There are other types of calculations you can use to get a more complete picture, such as internal rate of return. You could also combine them with other calculations, including cap rate and ROI.

Using DoorLoop as a Real Estate Investor in the Rental Property Market

How can DoorLoop help in all this?

Aside from offering great advice and a range of real estate investment calculators, DoorLoop provides a comprehensive platform to help you grow your property business, cut down on operating expenses, and maximize your earning potential.

It makes property management and the rental industry more manageable with a vast range of helpful tools.

Some of the standout features include:

  • A full suite of accounting and finance tools that help you keep track of all outgoings and incomings throughout the year
  • Online payment systems for collecting rent, sending automated reminders, and managing your bills
  • Maintenance management systems to streamline your practices for increased efficiency and decreased cost
  • Marketing tools to help keep your properties full- with connections to Zillow and Trulia for maximum exposure
  • Custom website building for tenant applications to help you find reliable renters (plus excellent tenant screening tools to limit risk)
  • User-friendly portfolio management for large or small real estate investment profiles
  • Built-in document storage to help you keep track of things in one accessible space

The list goes on! DoorLoop is essentially a one-stop shop for all your landlord and property investment needs from start to finish. Whether you have new investments in rental properties that you need to get up and running or are looking for a way to improve operations in your current business, DoorLoop's software can help.

If you want to learn more, you can schedule a free demo to explore the software and see for yourself how it can benefit you as you manage your rental properties and aim for new heights of success in the real estate market.

Summary

The cash-on-cash return formula is simple, easy to use, and gives a useful (albeit incomplete) idea of what a person could earn back on their investment in one 12-month period. If you are considering a real estate deal and wondering whether or not it is worthwhile, this is one of the calculations you can use to help yourself decide.

You can also use it if you are curious to find out how much you have earned back over the last year on a current investment without considering appreciation and market value.

If you need a smart, simple, and streamlined way to manage your property portfolio, rental income, and finances, DoorLoop is the all-in-one tool you need. Maximize your profitability and level up your rental business with the property management software that does it all.

David is the co-founder & CMO of DoorLoop, a best-selling author, legal CLE speaker, and real estate investor. When he's not hanging with his three children, he's writing articles here!

Legal Disclaimer

The information on this website is from public sources, for informational purposes only and not intended for legal or accounting advice. DoorLoop does not guarantee its accuracy and is not liable for any damages or inaccuracies.

doorloop