March 3, 2021

RE Investing Metrics: A Series are a collection of articles on important metrics to all real estate investors. This article dives into Cash on Cash Return on Investment, what it is, how its calculated and how an investor can use it to their advantage.

Cash on Cash Return on Investment (CoCROI)

Most investors would have heard of the term “Return on Investment” at some point, but it is important to distinguish between a few variations of returns calculations. In short, CoCROI is the relationship between a property’s Cash Flow and the Initial Capital Investment made:

CoCROI = Cash Flow/Initial Capital Investment

It is important to understand the purpose of this calculation, since you can actually use different variations of return calculations to measure different things. For the context of this article, we are going to be looking for a metric which allows us to compare properties and their returns. This means we can only include data that is property specific, and not a result of the particular investor and their particular choice of financing for the property.

With that said, let’s define Cash Flow for our CoCROI metric. In the most basic terms, Cash Flow is the difference between cash into the property and cash out of the property on an annual basis. The trick here is to understand what income to include and exclude, and what expenses to include and exclude. Since we are looking only for property specific data, we will not include loan proceeds (not income anyway) or interest earned in a savings account. For expenses, we will be excluding loan payments both principle and interest, since that is specific to the investor and how he/she financed the property. One number that we will be adding to our ‘expenses’ that investors often fail to add is capital expenditures. Since cap ex is not an expense in accounting terms, why should we include it? Adding the cap ex to our expenses allows us to compare well-kept properties to properties in need of lots of work. Remember, we are comparing property specific data, and how much work a property will need is absolutely property specific. If you need to pay for a $10,000 roof to bring a property to a rent-ready status, that will certainly affect the return.

To define Initial Capital Investment, we should be able to look at our HUD Settlement Statement from the closing of the property to see how much cash was/needs to be brought to the closing table, including closing costs. If additional capital was invested into the property after closing that will be added as well. Basically we are looking for how much capital was outlaid to bring the property to the point where it is ready to cash flow.

Dividing Cash Flow by Initial Capital Investment, we are able to see the return a particular property produces on a particular amount of cash outlay. We now have a way to compare different properties of different condition to see which will perform better at this metric. Of course there are more ways you need to look at a property than simply its CoCROI, but this metric is an important piece of the puzzle.

“This article, and the South Bend Management Co Blog in general, is intended for informational and educational purposes only, and is not financial advice. South Bend Management Co is not providing investment, tax, financial planning, legal, or real estate advice. South Bend Management Co is not your advisor or agent. Please consult your own experts for advice in these areas. Although South Bend Management Co provides information it believes to be accurate, South Bend Management Co makes no representations or warranties about the accuracy or completeness of the information contained on this blog.”