About Cash on Cash Return Calculator (Formula)
The Cash on Cash Return (COCR) Calculator is a valuable tool for real estate investors, business owners, and financial analysts who need to assess the efficiency of cash investments. Cash on Cash Return is often used to measure the annual pre-tax cash flow generated by an investment relative to the cash invested. This metric is especially popular in real estate because it gives a quick view of the return generated solely on the actual cash outlay.
Formula
The formula for calculating Cash on Cash Return (COCR) is:
COCR = CF / I
Where:
- COCR = Cash on Cash Return
- CF = Annual Cash Flow (Net income from the investment after operating expenses)
- I = Initial Investment (The total cash investment)
How to Use
Using the Cash on Cash Return Calculator is straightforward and includes these steps:
- Determine Annual Cash Flow (CF): Calculate the income generated by the investment over a year, after accounting for all operating expenses.
- Determine Initial Investment (I): Sum up the total cash invested in the property or asset. This may include the down payment, closing costs, and other initial expenses.
- Input Values: Enter the values for cash flow and initial investment into the calculator.
- Calculate COCR: Click the “Calculate” button to find out the Cash on Cash Return. This result will help assess how effectively your cash investment is working for you.
Example
Let’s say you have invested in a rental property with the following details:
- Annual Cash Flow (CF): $12,000
- Initial Investment (I): $100,000
Using the formula:
COCR = CF / I
COCR = $12,000 / $100,000
COCR = 0.12 or 12%
In this example, the Cash on Cash Return for your investment is 12%, meaning you are earning a 12% return on the cash you invested in the property.
FAQs
1. What is Cash on Cash Return?
Cash on Cash Return (COCR) is a financial metric that evaluates the cash income earned on an investment relative to the cash invested.
2. Why is Cash on Cash Return important?
COCR helps investors determine the efficiency of their cash investment, providing a quick view of return without accounting for financing or appreciation.
3. Is Cash on Cash Return the same as ROI?
No, ROI considers the total return on investment, including appreciation and financing, whereas COCR focuses only on cash flow compared to cash invested.
4. What is a good Cash on Cash Return percentage?
A good COCR varies by industry and investor expectations, but in real estate, a rate between 8% and 12% is generally considered favorable.
5. Can I calculate COCR for a financed property?
Yes, but COCR only accounts for the actual cash invested. Loan payments are subtracted from cash flow, but the loan amount itself isn’t factored into initial investment.
6. How does COCR help with property comparison?
COCR allows investors to compare properties based on cash returns to identify the most lucrative option.
7. Does COCR include tax implications?
Typically, COCR is calculated on a pre-tax basis, but investors may also assess it after taxes if desired.
8. How often should I recalculate COCR?
It’s best to evaluate COCR annually or when major changes occur in cash flow or investment amount.
9. Is COCR relevant for other investment types?
Yes, COCR can apply to any cash-generating investment, though it is most commonly used in real estate.
10. Can COCR predict long-term profitability?
COCR gives a snapshot of current cash flow efficiency but doesn’t predict future appreciation, potential refinancing, or long-term profitability.
11. Does COCR consider expenses?
Yes, COCR uses net income (cash flow after expenses) to calculate the return.
12. Is a higher COCR always better?
Generally, a higher COCR is favorable, but it should be balanced with other financial metrics for a comprehensive investment view.
13. Can COCR be negative?
Yes, if expenses exceed cash flow, resulting in a negative cash return relative to the initial investment.
14. How does COCR impact financing decisions?
COCR provides insight into cash flow but doesn’t directly impact financing, although it helps assess how financing affects investment returns.
15. Should COCR be the sole deciding factor in investment?
No, COCR is valuable but should be used alongside other metrics like ROI, cap rate, and net income to make informed investment decisions.
16. Is COCR applicable in business investments?
Yes, COCR is used in various business investments to determine cash efficiency, especially when evaluating cash-heavy businesses.
17. Does COCR include capital gains?
No, COCR focuses on annual cash flow only and does not include capital gains from asset appreciation.
18. Can COCR change over time?
Yes, as cash flow changes or additional capital is invested, COCR will fluctuate accordingly.
19. How does COCR differ from Cap Rate?
Cap Rate calculates return based on the total property value, while COCR uses only the initial cash invested as the base.
20. Can I improve my COCR?
Improving COCR involves strategies like increasing cash flow, reducing expenses, or lowering the initial cash investment through financing.
Conclusion
The Cash on Cash Return Calculator is a quick and effective tool for assessing the immediate return on cash investments. By focusing on cash flow in relation to cash outlay, it offers insight into an investment’s efficiency and suitability for various financial goals. COCR is especially useful in real estate investing, helping to determine which properties or ventures deliver optimal cash returns for the capital invested. Whether you’re a seasoned investor or just beginning, understanding your COCR can guide you toward better, more informed decisions.