“Know what you own, and why you own it.” - Peter Lynch

Cash-on-cash (COC) is an important metric when considering real estate purchase for investment. It is the cash earned in a year on your cash investment. 

Say you bought an investment property for $100,000 and put 20% down. You invested $20,000 on the property. The property rents for $1,000 a month. The maximum cash flow if the property is occupied the whole year is $12,000. Now, assume the expenses on the property including property taxes, repairs, landlord insurance, etc. was $4,000. After expenses, you have $8,000 total income ($12,000-$4,000). This is the net operating income (NOI). 

NOI = total income - expenses 

Please note that your mortgage payments on the $80,000 debt is excluded from NOI calculations. (Also excluded are capital expenditures, taxes and interest.) 

So, in our example, if the annual mortgage payment is $4,000, the actual cash left in your account at the end of the year is $4,000. 

Annual Cash Flow = NOI - Annual mortgage payment 

COC = Annual Cash Flow / Total Cash Invested 

Since your initial investment was $20,000, the cash-on-cash return on your investment is $4,000/$20,000 = 20%. 

How to use cash-on-cash return 

COC is estimated at the time of property purchase to determine if that property is worth purchasing. Each investor must determine what cash-on-cash return number is acceptable for them. Most investors aim for at least 10% cash-on-cash return. People who invest for appreciation may accept a lower COC. 

Important tip: Do not invest if you project the annual cash flow to be negative. Do not invest on projected appreciation alone. 

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