Instantly Estimate Your Rental Property’s Cash on Cash Return with Our Free Calculator

What Is Cash on Cash Return?

The cash on cash return (CoC return) is a real estate investment metric that measures the profitability of an investment property as the annual cash flow relative to the cash invested in it. Unlike other metrics that consider the entire property value, the cash on cash return focuses on out-of-pocket investments, offering a clear picture of the performance of a rental property in the short term.

The cash on cash return is expressed as a percentage which allows for the easy comparison of both markets and individual properties.

Cash on Cash Return Definition

Cash on cash return is defined as the annual pre-tax cash flow of a rental property divided by the total cash invested in the property. It is one of the most popular measures of return in real estate investing as it offers very comprehensive analysis.

Understanding Cash on Cash Return for Rental Properties

The cash on cash return metric is particularly useful for rental property investors as it focuses on the performance of the actual cash investment, not the property value. This makes it valuable when you're using financing, such as a mortgage, since the upfront investment is typically significantly smaller than the property's purchase price.

CoC return can be used for both short-term (Airbnb) and long-term (monthly) rental properties. For short-term rentals, it helps you gauge how well your property performs seasonally and whether your average daily rate (ADR) and occupancy rate are profitable. For long-term rentals, it allows you to evaluate the monthly rental rate and overall profitability. In both cases, the measure gives you a good understanding of whether your invested capital is giving you a good return.

Cash on Cash Return (CoC) vs Return on Investment (ROI)

Both cash on cash return and return on investment assess the profitability of a real estate investment, but they measure it differently.

The cash on cash return takes into account only the actual cash invested - which usually includes the down payment, closing costs, and immediate fixes and repairs - and the cash flow generated in a year.

Meanwhile, the ROI considers the total return over time - including rental income, appreciation, loan paydown, and tax benefits - relative to the full investment cost.

In sum, CoC return measures short-term profitability, while ROI focuses on long-term performance.

How to Calculate Cash on Cash Return in Real Estate

To calculate the cash on cash return of a rental property, follow this step-by-step approach:

1. Determine the annual rental income.
2. Calculate the annual operating expenses.
3. Get the annual loan payments.
4. Subtract the annual operating expenses and the annual loan payments from the annual rental income to get the annual pre-tax cash flow.
5. Add up the total cash invested including the down payment, closing costs, and upfront renovations.
6. Divide the annual pre-tax cash flow by the total cash invested and multiply by 100 to get the cash on cash return as a percentage.

Calculating cash on cash return for real estate properties is done using the following formula:

Cash on Cash Return Formula

Cash on Cash Return Equation

Cash on Cash Return = ((Annual Pre - Tax Cash Flow) / Total Cash Invested) × 100%

Where

• Annual pre-tax cash flow refers to the total income generated from the property over the course of a year (including rental income and other potential sources of revenue) minus the net operating expenses and annual mortgage payments.
• Total cash invested presents all cash investments in the property including the down payment, closing costs, and repairs.

As you can see from the formula, calculating cash on cash return is not easy as it requires multiple steps. Moreover, to be successful, you need to rely on accurate, up-to-date sources of real estate and rental data.

To make things clearer, let's take a look at a real-time example:

Cash on Cash Return Calculation Example

Let's look at two examples: 1) With financing and 2) Without financing.

Example 1:

An investor buys a property priced at $500,000 with a $100,000 down payment. He pays $20,000 in closing costs and initial repairs. The rental income is $3,500/month. The monthly operating costs are $500, and the monthly mortgage payment is $1,300.

• Annual Pre-Tax Cash Flow = (12 × $3,500) - (12 × $500) - (12 × $1,300) = $20,400
• Total Cash Invested = $100,000 + $20,000 = $120,000
• Cash on Cash Return = ($20,400 / $120,000) × 100% = 17%

So, the property has a CoC return of 17% if the investor uses financing.

Example 2:

The investor buys the property all in cash and spends $18,000 in closing costs and renovations. The monthly rental income is $3,500, and the operating expenses are $500/month.

• Annual Pre-Tax Cash Flow = (12 × $3,500) - (12 × $500) = $36,000
• Total Cash Invested = $500,000 + $18,000 = $518,000
• Cash on Cash Return = ($36,000 / $518,000) × 100% = 6.95%

So, the rental property generates a CoC return of 6.95% if the investor buys it in cash.

This example clearly shows that the method of financing has a major impact on the cash on cash return of a rental property.

What Is a Cash on Cash Return Calculator?

The cash on cash return calculator is an online real estate investment analysis tool that helps investors instantly estimate the profitability of a rental property based on how much cash they've invested and the expected annual cash flow. Instead of doing manual calculations, you simply input key metrics - such as purchase price, rental income, expenses, and loan details - and the calculator returns a readily available cash on cash return.

The Airbtics' cash on cash return real estate calculator helps you:

• Compare multiple locations to choose the best Airbnb markets for investing
• Compare different Airbnb properties for sale to select the most profitable opportunity
• Save time by performing calculations for you
• Eliminate error by replacing manual efforts
• Make better short-term rental investment decisions with a few clicks of a button

How to Use a Cash on Cash Return Calculator for Real Estate Investments

To use a cash on cash return calculator to find and analyze profitable real estate investment deals, follow these steps:

1. Enter the purchase price of the property.
2. Input your down payment and loan details.
3. Add estimated monthly rental income. You can use our Airbnb calculator to instantly and accurately project the income of your short-term rental property.
4. Enter operating expenses.
5. Get instant cash on cash return calculation.

With tools like Airbtics, you can run different scenarios by adjusting nightly rates, occupancy, and financing to see how they impact your CoC return. This is perfect for both first-time and seasoned vacation rental property investors.

Note that the cash on cash return calculator can be used to analyze the expected profitability of both markets and properties. For rental market analysis, simply enter the market-level data points, such as average property price and average monthly rental revenue.

Limitations of the Cash on Cash Return Calculator

While the cash on cash return is a powerful rental property analysis tool, it has some limitations that investors need to consider:

• Doesn't account for long-term appreciation or depreciation: The CoC return calculator only looks at cash flow, ignoring potential changes in the property value over time.
• Doesn't take into account tax implications: The tool doesn't factor in real estate depreciation, tax deductions, and capital gains tax, which can have major impacts on the profitability of a real estate investment property.
• Assumes stable income and expenses: Most calculators work with a consistent rental income which doesn't reflect seasonal fluctuations and vacancies, like those in the short-term rental industry.
• Reflects one-year performance: Cash on cash return usually focuses on the first year of ownership and doesn't capture how income and expenses might change over time.
• Depends on user inputs: The results of a cash on cash return calculator are only as good as the data that the investor uses. For accurate calculations, use reliable vacation rental data.