What Is a Good Cash on Cash Return Percentage?

Understanding Cash on Cash Return

Cash on Cash Return (CoCR) is a performance metric that helps investors assess the profitability of income-generating assets, most commonly real estate. It measures the annual pre-tax cash flow an investment generates relative to the actual cash initially invested, showing how much cash an investor receives back each year for every dollar put into a property.

CoCR provides insight into the efficiency of an investment’s cash flow, helping investors determine the immediate return on their out-of-pocket capital. Unlike other metrics that consider financing or total asset value, CoCR focuses specifically on the cash an investor has personally committed.

This metric is particularly useful for evaluating properties acquired with leverage, such as a mortgage, as it highlights the direct cash yield from the equity portion of an investment. Investors frequently use CoCR to compare the performance of different investment opportunities, especially when considering properties with varying financing structures.

Calculating Cash on Cash Return

The Cash on Cash Return formula is: (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100. This calculation yields a percentage representing the return on cash equity.

Annual pre-tax cash flow is derived by taking the gross rental income and subtracting all operating expenses and mortgage payments, before accounting for income taxes. Operating expenses include property taxes, insurance, maintenance, vacancy allowances, and property management fees. For example, if a property generates $24,000 annually in rent, and incurs $8,000 in operating expenses and $9,000 in mortgage payments, the annual pre-tax cash flow would be $24,000 – $8,000 – $9,000, which equals $7,000.

Total cash invested represents all out-of-pocket funds an investor contributes to acquire the property. This includes the down payment, closing costs, and any initial renovation or repair costs incurred before the property generates income. Continuing the example, if the investor made a $50,000 down payment, paid $5,000 in closing costs, and spent $2,000 on initial repairs, the total cash invested would be $57,000. Using these figures, the Cash on Cash Return would be ($7,000 / $57,000) x 100, resulting in approximately 12.28%.

Interpreting and Benchmarking Cash on Cash Return

What constitutes a “good” Cash on Cash Return percentage is not fixed, as it depends on various factors specific to each investment and investor. The ideal CoCR varies significantly based on the type of investment and prevailing market conditions.

For instance, a strong CoCR for a long-term residential rental property might differ from that of a short-term vacation rental or commercial property. Market conditions, including local economic growth, supply and demand, and interest rates, significantly influence what is considered an acceptable return. An investor’s personal financial goals, such as prioritizing consistent income versus long-term appreciation, also shape their definition of a desirable CoCR.

Risk tolerance also plays a role; higher-risk investments often require a higher CoCR to compensate for increased potential loss. While benchmarks vary, a Cash on Cash Return in the range of 8% to 12% is frequently considered strong for many real estate investments. However, this is a general guideline, and investors should research comparable properties in their specific target market to establish realistic expectations.

Complementary Financial Metrics

While Cash on Cash Return provides a valuable snapshot of an investment’s immediate cash profitability, it represents only one aspect of a comprehensive financial analysis. Investors should consider several other financial metrics alongside CoCR to gain a more complete understanding of an investment’s overall performance and risks. These additional metrics offer insights that CoCR alone does not capture, such as long-term value appreciation or debt repayment capacity.

The Capitalization Rate (Cap Rate) is one such metric, measuring the unlevered rate of return an investment generates based on its net operating income and acquisition cost. Unlike CoCR, it does not account for financing, providing a different perspective on the property’s inherent earning potential. Return on Investment (ROI) broadly measures the total profit generated from an investment relative to its total cost over a specific period, often encompassing both cash flow and appreciation.

For a more sophisticated analysis, the Internal Rate of Return (IRR) considers the time value of money, providing a discount rate that makes the net present value of all cash flows from a particular project equal to zero. This metric is useful for comparing investments with different cash flow patterns over time. The Debt Service Coverage Ratio (DSCR) assesses an investment property’s ability to cover its mortgage payments, indicating the financial health and risk associated with the debt. These metrics collectively offer a more robust framework for evaluating investment opportunities.