Breaking Down Cash on Cash Returns

One crucial metric in multifamily real estate is the Cash on Cash (CoC) return.

This metric helps investors evaluate the annual return they are earning on the cash they invested in a property.

Let's break it down with a specific example.

What is Cash on Cash Return?

Cash on Cash return is the ratio of annual pre-tax cash flow to the total cash invested.

It's a straightforward way to measure the profitability of a real estate investment, particularly for those who finance a portion of their purchase with debt.

Formula:

CoC Return= (Annual Pre-Tax Cash Flow) / (Total Cash Invested) X 100

Example Calculation:

Property Details (keeping it simple here):

Purchase Price: $1,000,000

Down Payment (25%): $250,000

Loan Amount (75%): $750,000

Annual Rental Income: $120,000

Operating Expenses: $60,000

Annual Debt Service (mortgage payments): $40,000

Step-by-Step Calculation:

Calculate Annual Pre-Tax Cash Flow:

Annual Pre-Tax Cash Flow = Annual Rental Income – Operating Expenses – Annual Debt Service

{Annual Pre-Tax Cash Flow} = $120,000 - $60,000 - $40,000 = $20,000

Determine Total Cash Invested:

The total cash invested includes the down payment and any other initial costs, but for simplicity, we'll use just the down payment in this example:

{Total Cash Invested} = {Down Payment} = $250,000

Calculate Cash on Cash Return:

{Cash on Cash Return} = $20,000/ $250,000 × 100 = 8%

What Does This Mean?

An 8% Cash on Cash return means that for every dollar invested in cash, the investor earns 8 cents annually before taxes (showing the immediate return on the actual cash investment).

Why is CoC Important?

Direct Feedback: It provides a direct glimpse into the profitability of the property without considering long-term factors like appreciation.

Comparative Analysis: Investors can compare the CoC return with other investment opportunities.

Financing Impact: It highlights the impact of financing on returns, helping investors understand the benefits/drawbacks of utilizing debt (which amplifies both good and bad).

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The Cash on Cash return allows us to make more informed decisions and ultimately create baselines for the yields we need to execute projects.

The Touch Points We Need

Matching property management to your portfolio is more nuanced than most think.

Have to be very careful in pairing sizes appropriately. The PM firm with 10,000 units across 35 buildings isn't going to provide the touch points you need for your 10-unit.

Need to seek out the emerging mid-sized PM companies, get in front of them, and ultimately determine if they're a match (references are huge here).

A search for that delicate blend of good people, an embedded sense of urgency, attention to detail, responsiveness, and general market knowledge (to bolster your own).

Buying Complexity & Creating Simplicity

Each deal we do involves untangling, improving, and usually a ton of creative solutions.

We’ve inherited non-paying tenants upon an acquisition, termite infestations, shared utility meters, a property without a sewer tap, foundation issues, sink holes, rodent infestations, and more.

With that said, the value in each project is often uncovered through making the complex situations simple.

Removing problem tenants with a standardized process improves the environment of the apartment complex.

Remedying building issues and renovating units should improve values and subsequently the rents you can get (utilizing zoning to add additional units will do the same).

Leveraging city programs to trim utility installation costs will improve your budget.

If you have an answer or a person for these issues and have encountered them enough- it’s just a game of how long this will take us, what costs we’ll incur during this process, and what price will give us the returns we need for the work.

Complexity often deters interest as some can’t take the risk of executing projects they’ve never done before.

As we refine our process with each deal, we’re better equipped to take them on.