There are many metrics used by real estate investors to measure the performance of various income generating properties, and use it to decide whether to buy or not to buy a property. Few of the most used metrics are gross operating income (GOI), gross rent multiplier (GRM), debt coverage ratio (DCR), loan to value ratio (LTV), net operating income (NOI), internal rate of return (IRR) and capitalization rate (cap rate).
Those who invest in rental property can calculate their returns using CoC or Cash On Cash Return. This is currently the most popular among the metrics used by real estate investors.
The calculation is easy, CoC is equivalent to the Annual Pre-Tas Cash Flow over Total Cash Investment.
The calculation will vary depending on whether the investor acquires it through a loan or they acquire it and pay in cash.
To cite a clear example for rental property purchased in cash:
The investor buys a rental property of $800,000 in cash and he/she receives monthly rental of $3000 and expenses of $1000. So, the calculation would be total income in a month of $3000 less $1000 expenses equals to $2000. Hence, to calculate the annual income, it would 12months multiplied by $2000, which is resulting to $24000.
The CoC would be $24000 divided by $800000 = 3%
What To Include In Cash On Cash Return Calculation?
The operating expenses landlords will put on the CoC return calculation are generally the expenses landlords spend on the day to day operations of the rental properties. These costs, include:
- Advertising and marketing: to cite examples under this criterion, rental property is still not occupied or the space will be vacant in the next few months or the landlord is looking for partners or selling the property
- Property insurance: this must be updated yearly
- Property taxes: taxes are shouldered by the land owners and not the tenants
- Trash collection: although not as expensive, any cost must be included
- Utilities: utilities include water, electricity and the like
- Property management: this includes the salary of the managers and employees if any, their day to day expenses as they perform their jobs
- Pest control: This is also important as getting this service can help you keeping a pest free environment
It is important that all expenses listed are part of the operating expense to ensure you will get accurate results. To cite examples are for printer ink, you can only list expense under this criterion if the printing is used for the purpose of marketing, like print flyers and posters.
To name few of the expenses that must not be included under expenses are:
- Personal labor of landlord/s
- Fines and penalties for law violations or anything else of the like
- Lobbying expenses
- Political contributions
- Charitable donations
- Illegal bribes or kickbacks
It is necessary that all information inputted on CoC are correct, or else you cannot find an accurate result you are looking for.