Cash-on-Cash Yield in Real Estate: Formula and Example

In real estate investing, understanding financial metrics is crucial for evaluating the performance and profitability of an investment. One such key metric is Cash-on-Cash Yield, which provides insights into the return on cash invested in a property. This article aims to define Cash-on-Cash Yield, present the formula for calculating it, and provide a real-world example to illustrate its application.

Defining Cash-on-Cash Yield

Cash-on-Cash Yield, often abbreviated as CoC, is a financial metric that measures the annual return on the actual cash invested in a real estate property. It represents the percentage of cash earned on the total cash invested, offering investors a clear perspective on the profitability of their investment.

Formula for Calculating Cash-on-Cash Yield

The formula for calculating Cash-on-Cash Yield is straightforward:

Cash-on-Cash Yield (%)=(Annual Cash FlowTotal Cash Invested)×100Cash-on-Cash Yield (%)=(Total Cash InvestedAnnual Cash Flow​)×100

• Annual Cash Flow: The net income generated by the property after deducting all operating expenses, mortgage payments, and taxes.

• Total Cash Invested: The sum of all cash outlays related to the property, including the initial purchase price, closing costs, and any renovation expenses.

Real-World Example

Let's consider a real-world example to illustrate the calculation of Cash-on-Cash Yield:

Property Details:

• Purchase Price: $200,000

• Closing Costs: $10,000

• Renovation Expenses: $15,000

• Annual Rental Income: $30,000

• Operating Expenses (excluding mortgage): $8,000

• Mortgage Payments: $12,000

Calculation:

Total Cash Invested = Purchase Price + Closing Costs + Renovation Expenses

Total Cash Invested = $200,000 + $10,000 + $15,000 = $225,000

Annual Cash Flow = Annual Rental Income − (Operating Expenses + Mortgage Payments)

Annual Cash Flow = $30,000 - ($8,000 + $12,000) = $10,000

Cash-on-Cash Yield (%) = ($10,000/$225,000) × 100 ≈ 4.44%

Conclusion

Cash-on-Cash Yield is a valuable metric for real estate investors to assess the return on their cash investment, providing a clear indication of the property's profitability. By utilizing this formula and understanding the cash flow dynamics, investors can make informed decisions and optimize their real estate investment portfolios.