About Cash on Cash Return
While Cap Rate evaluates the property, Cash on Cash (CoC) Return evaluates your specific investment strategy. Most real estate is bought with debt (leverage). You might only put down $25,000 to control a $100,000 asset. CoC Return measures how hard that $25,000 is working for you.
The Power of Leverage
CoC = Annual Pre-Tax Cash Flow / Total Cash Invested
Imagine buying a $100k house with cash. It nets $6k/year. Return = 6%.
Now imagine buying it with 20% down ($20k). You pay interest, so your net drops to $2k/year. But your invested cash is only $20k. Return = ($2k / $20k) = 10%.
By using leverage, you increased your return rate from 6% to 10%.
Why it Matters
For new investors with limited capital, CoC is the most important metric. It tells you how fast you can recoup your initial investment to reinvest in the next deal. A CoC of 20% means you get all your money back in 5 years purely from cash flow.
How to Use
Input your expected Monthly Cash Flow (Rent minus Mortgage/Taxes/Expenses) and your Total Cash to Close (Down Payment + Closing Costs + Rehab). The tool gives you the percentage efficiency of your dollar.