Cash on Cash Return on Investment
When analyzing real estate deals, one of your biggest concerns should be the rate of return (also known as return on investment or ROI). What is the percentage return on the capital invested? One metric many real estate investors like to use is Cash on Cash Return on Investment (CoCRoI). It is the amount of cash flow you receive relative to the amount of money you pay out-of-pocket for the property.
CoCRoI = Pretax Annual Cash Flow / Cash Out-of-Pocket
If you have had an interest savings account and/or investing in the stock market (such as holding dividend yielding stocks and interest yielding bonds), you might be familiar with CoCRoI. For instance, if you invest $1,000 in a stock that pays out $30 in annual dividends, your CoCRoI on that $1,000 is 3% of your capital invested. Likewise, if you pay $1,000 cash out-of-pocket to acquire a property that generates $50 in cash flow annually, your CoCRoI yield is 5%.
Being able to draw this parallel across different investments (or asset classes) is pretty cool, right? You can easily compare rates of return on rental property investing to lending and investing in the stock market. Knowing that the stock market historically returns 7% to 8% annually, is a Cash on Cash Return yield of 6% on an investment property a good return (keep in mind that different asset classes have different levels of risk and CoCRoI doesn’t account for relative risk factors)? As a newbie real estate investor (but a somewhat seasoned stock market investor), I certainly appreciate this familiarity.