Cash on Cash Return (CoC)

Cash on Cash Return is most commonly used during the purchase stage of an investment property to evaluate its potential profitability by comparing annual cash flow to the initial cash invested. Let's dive into the nuts-and-bolts.

Cache on Cache Return expresses the ratio between annual cash flow and the total cash invested, shown as a percentage.

The formula expresses the ratio between annual cash flow and the total cash invested, shown as a percentage:

Cash on Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested * 100

Annual Pre-Tax Cash Flow is the Effective Gross Income minus Operating Expenses and Debt Service. Effective Gross Income is the Gross Scheduled Rent minus Vacancy Loss.

Effective Gross Income = Scheduled Rent - Vacancy Loss

Gross Schedule Rent is the total amount of rent collected over a year. That is, a property leasing at $2500 a month, would have a Gross Schedule Rent of $30,000 dollars. Vacancy Loss is the expected vacancies over the same period. For example, the vacancy rate could be 5% of the Gross Scheduled Rent, or $1500 dollars. So the Effective Gross Income is $30,000 - $1,500 or $28,500.

Operating Expenses are the recurring costs to run the property and include:

• Property taxes

• Property insurance

• Repairs & maintenance

• Property management fees

• Utilities (if paid by landlord)

• HOA dues (if applicable)

• Landscaping & snow removal

• Trash service

• Advertising/marketing for rentals

• Legal/accounting fees (recurring)

Debt Service is the annual principal repayments and interest payments made towards the mortgage used to finance the property. This does not include taxes and insurance if separating them as operating expenses.

Total Cash Invested are the one-time, upfront costs before renting that include:

• Down payment on the loan (if any)

• Closing costs (title, escrow, recording, appraisal, loan fees)

• Initial repairs and renovations

• Prepaid property taxes & insurance (if not reimbursed)

Scenario 1: Buying with All Cash

Imagine purchasing a $400,000 single-family rental home without a loan. The property rents for $2,500 per month, which amounts to $30,000 in gross scheduled rent each year. To account for potential vacancies, you apply a 5% vacancy rate, resulting in an expected loss of $1,500 annually. This brings your effective gross income to $28,500.

Operating expenses including property taxes, insurance, maintenance, and management total $10,000 for the year. Since there’s no mortgage, there are no debt service payments. Subtracting operating expenses from the effective gross income gives an annual pre-tax cash flow of $18,500.

Because the property was purchased outright, the total cash invested includes the full $400,000 purchase price, plus $7,000 in closing costs, $5,000 for initial repairs, and $1,500 in prepaid expenses like property taxes or insurance. Altogether, that’s $413,500 in cash out of pocket.

The Cash on Cash Return in this scenario is calculated by dividing the $18,500 in annual cash flow by the total investment of $413,500. The result is a return of approximately 4.47%  steady and predictable, with no mortgage risk.

Scenario 2: Buying with a 25% Down Payment

Now consider the same property, but this time finance 75% of the purchase price with a loan. That means putting down $100,000 and borrowing $300,000. At a 6.5% interest rate over 30 years, the monthly mortgage payment comes to around $1,896, or about $22,752 per year in debt service.

As before, the effective gross income is $28,500 after accounting for a 5% vacancy rate. Subtracting $10,000 in operating expenses and $22,752 in mortgage payments leaves an annual pre-tax cash flow of $4,252. In this case, the property actually loses money on a cash flow basis due to the high cost of debt service.

The total cash invested in this scenario includes the $100,000 down payment, plus $7,000 in closing costs, $5,000 in initial repairs, and $1,500 in prepaid expenses totaling $113,500.

To calculate your Cash on Cash Return, you divide the negative annual cash flow of –$4,252 by your $113,500 investment. This gives you a return of (–3.74%), a negative cash flow investment, meaning a need to cover the shortfall out of pocket each year.

What does this all mean?

Cash on Cash Return is a great metric for evaluating initial income performance. It provides insight into how a property is likely to perform financially in the short term and is especially useful for comparing properties when evaluating potential purchases.

However, what qualifies as a "good" return can vary widely depending on several factors. In high-cost markets, CoC returns tend to be lower due to elevated property prices. Financing structure also plays a significant role — as seen in the example, CoC can vary based on the relationship between rent and debt service.

All-cash deals typically yield lower CoC returns, but they also carry less financial risk. Turnkey properties in stable markets often offer lower CoC returns but require minimal involvement. In contrast, distressed or value-add properties have the potential for higher CoC returns but generally involve more effort and risk.

Here is how Cash on Cash Return is generally viewed.

CoC Return	How It’s Generally Viewed
< 4%	Low — usually not worth the effort unless there's strong appreciation or tax upside
4–6%	Modest — common in high-priced markets or low-risk areas
6–8%	Solid — often targeted by investors seeking balanced returns
8–10%	Strong — attractive for cash flow-focused investors
10%+	Excellent — high cash flow, but may carry more risk or require active management

Although useful, Cash on Cash Return doesn't tell the full story. For example, a property with a 5% CoC in a market appreciating at 7% annually might ultimately outperform a property with a 10% CoC in a stagnant or declining market.

That’s why it’s important to use Cash on Cash Return alongside other key metrics, such as:

• Internal Rate of Return (IRR): Reflects the total expected return over time, including appreciation and equity buildup.

• Return on Equity (ROE): Measures how efficiently your existing equity is generating returns.

• Capitalization Rate (Cap Rate): Indicates the property's unleveraged income yield based on market value.

• Total Return: Combines cash flow, appreciation, tax benefits, and loan pay-down for a complete performance picture.

The information provided in this blog is for general informational purposes only and does not constitute legal or financial advice. While striving to ensure accuracy, the content may not reflect the most current data, and it is not a substitute for professional council. You should consult a qualified professional for advice regarding your specific situation. Use of this information does not create an agent relationship and does not offer any guarantees, assurances, or protections from legal or financial liability.