Income Subsidized

Identifies whether any of the income to the property is subsidized; rents that are partly paid by the government (e.g. Section 8 residential subsidies).

Cash on Cash - What Real Estate Investors Need to Know About this Popular Return!

To begin with, real estate investors should be aware that cash on cash (CoC) is not a particularly powerful tool for measuring the profitability of rental income property and currently gets less attention in real estate investment analysis than it used to receive some years ago.

Its shortcoming, perhaps, lies in the fact that cash on cash return doesn’t take into account time value of money. As a result, cash-on-cash return must be restricted to simply measuring a residential income property’s first year cash flow and not its future year’s cash flows.

Nonetheless, cash on cash is not without validity and still offers seasoned and beginning real estate investors a benefit that has always attributed to its popularity:

Cash on cash provides an easy way for real estate investors to gauge the profitability of a real estate income property against another investment opportunity and to quickly compare the profitability of similar income-producing properties.

Cash-on-cash return measures the ratio between anticipated first-year cash flow to the amount of initial cash investment made by the real estate investor to purchase the rental property. Hence cash on cash is always expressed as a percentage.

Okay, but let’s be sure we understand the two components used for the return.

  1. The first-year cash flow (or annual cash flow) is the amount of money the property is expected to generate during the first year of operation.
  2. The initial investment (or cash invested) is not cash down payment alone. It is the total amount of cash the investor expects to invest to purchase the property and includes loan points, escrow and title fees, appraisal, and inspection costs. This is sometimes also referred to as the cost of acquisition.

Cash on Cash Calculation

Annual Cash Flow / Cash Invested = Cash on Cash Return

Example:

Let’s assume that you’re interested in purchasing a property with six units each paying $1,000 per month rent and annual operating expenses of $28,800. You are planning on a $126,000 down payment, loan points of $2,940, and closing costs of $2,100. Let’s also assume that the monthly mortgage payment will be $1,956.

Okay, let’s make the calculation.

  1. Calculate the annual mortgage payment: $1,956 for twelve months equals an annual mortgage payment of $23,472.
  2. Calculate the annual cash flow: Six units at $1,000 for twelve months equals $72,000, less annual expenses of $28,800 equals $43,200, less annual mortgage payment of $23,472 equals an annual cash flow of $19,728.
  3. Calculate the initial cash investment: Down payment of $126,000 plus loan points of $2,940 plus closing costs of $2,100 equals $131,040 cash investment.
  4. Calculate the cash on cash return by dividing annual cash flow of $19,728 by cash investment of $131,040. Your cash on cash return is 15.06%.

Real estate investors should not rely solely on cash on cash return when making real estate investment decisions, and are advised that there are better ways to evaluate an income-property investment when real estate investing.

Still, cash on cash is often used for real estate investment analysis because it is easy to calculate and does allow a quick comparison to alternative investments such as a T-Bill rate. So it’s not a bad idea for real estate investors to be aware of cash on cash, learn how to calculate it, and include it in any cash flow analysis reports.

There may come a day when you are selling your rental income property and encounter a buyer who does highly deem cash on cash return. By knowing how to show this basic investment measure you may find it just what you need to close to the deal.