What is Cash on Cash?
To be honest, this is one of my favourite numbers when dealing with Real Estate investments. At its core, Cash on Cash Return (Often referred to as CoC) is simply a ratio of the projected profit to the investment in a specific project. It shows how profitable a deal is relative to the amount of money required to purchase it.
Let’s Break it Down
Since Cash on Cash is simply a comparison of 2 numbers, first we need to understand what we are working with. First we have the Yearly Profit.
The Yearly Profit is the total of all the income from an investment minus all of the expenses. For example, if you own an apartment and there is $100,000 in rents collected every year and $80,000 of expenses each year, the total Yearly Profit would be $20,000.
Next, let us look at the Total Investment. This is the sum of all the money that is invested. If we continue the example from above, let’s say that we purchased the apartment for $1,200,000. We got a mortgage for the property with 25% down payment ($300,000). There were also some inspections, reports, and closing costs associated with the deal that cost us $30,000. That means that our Total Investment in this apartment building is $330,000.
Now that we have all the numbers, we can figure out what the Cash on Cash Return for our investment is. First, we take our Yearly Profit ($20,000) and divide it by the Total Investment ($330,000). This gives us a number with a whole bunch of zeros. 0.06060 Since this is a percentage, we have to multiply that number by 100 to get something that makes sense. That means that our Cash on Cash Return on this investment is 6.06%.
What does Cash on Cash actually mean?
Fantastic! Now we know that we have 6.06% Cash on Cash Returns on our investment, but what good does that do? Well, this number is extremely common in various forms of investing and even in your bank accounts! If you look at chequing and savings accounts, they almost always have an Interest rate. The interest rate is how much your bank will pay you every year for keeping your money stored (invested) with them. Most banks have something like 0.01% returns on chequing accounts and if your lucky, your bank will give you 1% each year on your savings!
If we look to typical bank investment options, most places have GIC investment options with a term and a fixed Cash on Cash Return. Depending on the term, banks will give you between 1% and 3% Returns for money invested in a GIC.
Now, that you have an idea of what the Cash on Cash Return is and how to calculate it, we are able to see how you can use this number to analyze investment opportunities.
How to use the Cash on Cash number?
Now that you know what Cash on Cash Returns are, what they mean, and how they affect your investments, you can make much more educated decisions on where and how to invest your money!
If you got value from this post or have questions, feel free to leave a comment below!
