Cash-on-cash (CoC) is a way to measure the cash flow percentage derived from an investment that you made. Generally, cash flow investors will look at cash on cash returns, as a starting point when considering an investment or comparing multiple investments. Cap rates, IRR and ROI do not always rule the day, they are just more metrics to be discussed at another time. You can not go broke if every deal you make has positive cash flow from day one.
Let me help you remember how to calculate cash on cash. Think… How much Cash will I put IN my pocket every year? Divided by how much cash I pulled OUT of my wallet one time? You could remember it: divide $In/$Out. That is $$ IN your pocket / $$ paid OUT to get it.
For example (Deal 1), you bought a single-family home for $385K with 25% down (so you get a break on the interest rate). That’s $96,250 out of your pocket. But wait, there’s more. You had closing costs +/- 2% and apx. $30K in updates… that’s OUT of your wallet $134,750.
Now, start adding up all your expenses (and I include everything) … Mortgage payment (principal and interest), insurance, taxes, utilities for cleaning and showing, property management, termite/pest contracts, POA dues, vacancy factor for the area, etc. Cost of ownership = $2,060/month. You did your homework by looking up rents in the area and know rental rates for this area at .90/sq. ft. and will bring in $3,100/month on this property. You take $3,100 rent and subtract all the expenses of $2,060 = $1,037/month or $12,444/year. Now you now know how much money will be IN your pocket.
$12,444 (IN) your pocket / $134,750 (OUT) of your wallet = .092 or 9.2% Cash-on-Cash return.
How is this helpful? Well, you found another property (DEAL 2) for $225K and it doesn’t need as much work, so less money out of pocket. Great, right? You built a spreadsheet in excel after the first go around and now you punch in the numbers on this one. This one will put $5,345 (IN) your pocket and it will require $67,500 (OUT) of your wallet. What will be your cash-on-cash return? Which one is better? Post an answer back.
Advanced: The home value goes up, it was a BRRRR, whatever… but you refinance either deal and pull all of your capital back out and continue to let the tenants cover the debt with a positive cash flow. Now you have ZERO money in the deal and your still getting paid!! Are you with me?
Calculate your cash-on-cash return of any amount IN your pocket yearly divided by NOTHING out of your pocket. Ie. $5,000 yearly income / Zero OUT of your wallet. Can you say INFINITE? How many of those can you do?
These same principles apply to multi-family, storage, commercial, etc.