Cash On Cash Rate Calculator - Real Estate Investment Equations Formulas

Investment Real Estate Property Land Residential Commercial Building Formulas

Note, cash on cash rate is also called equity dividend rate.

Problem:

Solve for cash on cash rate.

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Solution:

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	cash on cash rate
	annual cash flow
	cash invested

References - Books:

Gallinelli, Frank. 2004. What Every Real Estate Investor Needs to Know About Cash Flow and 36 Other Financial Measures. McGraw Hill.

Background

Cash on Cash Return (COCR) is a rate of return metric used in the real estate investment industry to measure the income earned on the cash invested into a property. It's calculated strictly on the cash-in and cash-out basis, providing investors with an analysis of the profitability of their investments relative to the amount of cash put into the project. COCR is particularly useful because it considers the influence of debt on the investment, distinguishing it from other standard metrics like internal rate of return (IRR) or return on investment (ROI).

Equation

COCR is calculated using the following formula:

COCR = Annual Cash Flow (ACF) / Cash Invested (CI) x 100

Annual Cash Flow (ACF): The net cash income from the investment over a year. This includes rental income, for example, minus all cash expenses like maintenance, utilities, and mortgage payments.
Cash Invested (CI): The total initial amount of cash invested to acquire the property. This can include down payment, closing, renovation, and other out-of-pocket expenses paid in cash.

How to Solve

To solve for COCR:

Calculate the property's ACF by subtracting all the annual cash expenses from the total cash income generated by the property.
Determine the total CI by summing all the cash expenses incurred when purchasing and preparing the property for rent or sale.
Divide the ACF by the CI.
Multiply the resulting number by 100 to express the COCR as a percentage.

Example

Suppose you purchased a rental property for $100,000 in cash, with an annual rental income of $12,000 and yearly expenses (maintenance, taxes, insurance) of $2,000.

ACF = $12,000 (annual income) - $2,000 (yearly expenses) = $10,000

CI = $100,000 (purchase price)

COCR = ($10,000 / $100,000) x 100

COCR = 10%

Your cash-on-cash return for this property investment would be 10%.

Fields/Degrees It's Used In

Real Estate: Investors and analysts use COCR to assess the performance of rental properties.
Finance: Financial advisors use COCR to compare the profitability of different investment opportunities.
Business Management: Managers use it to analyze the effectiveness of cash spent within business operations or expansions.
Economics: Economists may utilize COCR to evaluate the efficiency of cash injections into the economy.
Accounting: Accountants may calculate COCR to provide insight into the cash return for business investments.

Real-life Applications

Comparing Investment Properties: Real estate investors often use COCR when determining potential income-generating properties.
Evaluating Business Ventures: Entrepreneurs estimate COCR to judge the potential return of starting a new business or product line.
Project Funding: Companies may use COCR to decide how to fund a project through cash investment or financing.
Performance Measurement: To assess performance, corporations compare the COCR across different divisions or product lines.
Investor Reporting: Investment firms can provide COCR figures to investors as part of performance reporting on cash-intensive investments.

Common Mistakes

Ignoring Non-Cash Expenses: Focusing solely on cash items and neglecting accrual basis expenses such as depreciation can lead to incorrect COCR.
Miscalculating ACF: Not including all variable and fixed expenses or miscalculating rental income.
Overlooking Additional Cash Investments: Not accounting for all the initial cash investments can skew the ratio.
Confusing Financing Costs: Misinterpreting the difference between cash investment and financed amounts.
Neglecting Future Cash Flow Changes: Assuming that cash flows remain stable over time without considering potential expenses or rental income increases.

Frequently Asked Questions with Answers

Is a higher or lower COCR better?
A higher COCR typically indicates a better return on investment, implying more income per unit of cash invested.
What's considered a good COCR?
This depends on the market and investment type, but generally, an 8-12% COCR is considered healthy in real estate.
Can COCR be negative?
Yes, if the property's annual expenses exceed the income, resulting in a negative ACF.
How does debt affect COCR?
Debt doesn't directly factor in the COCR calculation since it's based on cash invested, not total price. However, mortgage payments are part of the annual cash expenses.
Does COCR account for property appreciation?
No, COCR is based on cash flow and does not include capital gains from property appreciation.

Cash On Cash Rate Equations Calculator