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A cash-on-cash return, often called a cash yield or just CoC, is a metric used to forecast the investment yield for a property, nearly always for a one-year period. The calculation is simple: Divide the expected pre-tax annual net revenue from a property by the cash invested. The resulting percentage is your cash-on-cash return.
Example of Cash-on-Cash Return
You plan to acquire an office building for $9 million. You will invest $5 million directly, taking a mortgage to cover the remaining $4 million. The annual pre-tax income from the property equals $600,000. Your expenses during this same period are projected to be $350,000, including your loan payments. Thus, your annual net revenue can be calculated as $250,000. The cash-on-cash return can be calculated at 5% for the year, as seen below:
$250,000 ÷ $5 million = 5% cash-on-cash return
Cash on Cash Return Calculator
Use our calculator below to forecast your cash-on-cash return. Note that all income and all expenses (except for tax) must be included to accurately project your return.
Uses & Limitations
Cash-on-cash return can provide a straightforward figure to determine the current or future profitability of an investment. This can also be helpful in assessing how large of a loan to take.
The main limitation when using CoC calculations is that the metric typically only measures income and expenses during a single year. This can cause some discrepancies in calculating a property’s long-term profitability, as many commercial real estate investors factor in proceeds of the asset’s eventual sale. However, CoC calculations will not include that revenue until the year the property is actually sold.
Another limitation is in terms of using CoC as a predictor of your return. If a property needs unplanned capital improvements — such as replacing a roof or upgrading an HVAC system — this will significantly impact your expected net income from the investment, thus throwing off the accuracy of a forecasted cash-on-cash return.
Finally, cash-on-cash return metrics may not accurately reflect the quality of an investment, particularly if the property is undergoing significant rehabilitation or upgrades — the rental income from a largely vacant multifamily asset undergoing extensive capital improvements may not reflect the investment upside due to the lack of rental revenue.
Differences Between ROI and Cash-on-Cash Return
While cash-on-cash return is sometimes used interchangeably with ROI, or return on investment, these metrics are not the same. ROI calculations also include outstanding debt, tax incentives, appreciation or depreciation and more on a property.