Cash on Cash Return

What is it?

In a previous post, we discussed capitalization rate, cash on cash (CoC) return is a similar metric in the sense that it is a good indicator of the return potential of the asset. The difference between cap rate and cash on cash returns is the financing used to acquire the asset. Most importantly, the way to think of CoC is as distributable cash flow or cash provided by operations that PeerInvest can payout to investors as a dividend. Another key distinction is that the basis for capitalization rate is the property value or purchase price, however for cash on cash return it is the cash required to purchase the property. In many cases, this is equal to a down payment plus closing costs.

Why is it important?

There are three forms of returns for shareholders of a PeerInvest property. Appreciation, debt paydown, and cash flow (or dividend). Cash on cash return determines the dividend paid out each quarter and is the realizable return for each calendar year as other forms require a liquidation of the property to realize.

How it is calculated?

Similar to the capitalization rate, to calculate the cash of cash returns of a property one must start by calculating net operating income (NOI), then subtract debt payments, and divide by the cash required to close on the acquisition.

Rental Property Example

First, we start by calculating the NOI of the property.

Next, we calculate cash flow by subtracting debt payments. If purchased with a mortgage, this is the monthly mortgage payment multiplied by 12 and in the case of an all-cash purchase, the debt payments are 0.

Lastly, divide cash flow by the cash required to acquire the property.

As always, feel free to reach out to us at support@peerinvest.io. We believe in education and ensuring all our investors have the knowledge and information required to make informed investment decisions.