7 Tactics To Increase Cash On Cash Return On Investment Properties

In the world of real estate investing, cash flow is king. But how do you truly measure the success of your investment property? Enter cash on cash return (CoC return), a powerful metric that cuts through the noise and reveals your investment's true potential.

As an investor, you're always on the hunt for the best ways to optimize your returns. CoC return is a tool that can help you do just that, offering a clear picture of your property's performance and guiding you towards smarter investment decisions.

In this article, we'll dive deep into the world of CoC return, exploring what it is, how to calculate it, and most importantly, how to use it to supercharge your real estate investing strategy. So buckle up and get ready to unlock the secrets of this game-changing metric.

What is Cash on Cash Return?

Cash on cash return is a metric that measures the annual return on your investment property relative to the amount of cash you've invested. It's a straightforward way to evaluate the performance of your investment, taking into account only the cash you've put in, not the total value of the property.

To calculate CoC return, you simply divide your annual pre-tax cash flow by your total cash invested. This gives you a percentage that represents your return on investment for that year.

Example of Cash on Cash Return

Let's say you purchase an investment property for $200,000. You put down $40,000 in cash (20% down payment) and finance the rest with a mortgage. In the first year, the property generates $12,000 in rental income after all expenses (including mortgage payments) have been paid.

To calculate your CoC return, you would divide your annual pre-tax cash flow ($12,000) by your total cash invested ($40,000). In this case, your CoC return would be 30% ($12,000 / $40,000 = 0.30, or 30%).

CoC return focuses on cash invested: Unlike other return metrics that consider the total value of the property, CoC return only takes into account the actual cash you've put into the deal. This gives you a more accurate picture of how hard your money is working for you.
It's a snapshot of annual performance: CoC return is calculated on an annual basis, so it provides a clear picture of your investment's performance year by year. This can be especially useful for tracking the impact of any changes you make to the property or your management strategy.
CoC return is a powerful comparison tool: Because CoC return is expressed as a percentage, it's easy to compare the performance of different investment properties or to benchmark your returns against other investors. This can help you make more informed decisions about where to invest your money.

Benefits of Focusing on Cash on Cash Return

Cash on cash return is a powerful metric for real estate investors. It cuts through the complexity of investment analysis, providing a clear, straightforward way to evaluate the performance of your investment properties.

CoC return focuses solely on the cash you've invested and the cash you're receiving in return. This makes it an excellent tool for identifying the true profitability of your investments. By factoring out the noise of non-cash expenses and focusing on actual cash flow, CoC return gives you a more accurate picture of how your properties are performing.

Another key benefit of CoC return is that it allows for easy comparison between different investment opportunities. Because CoC return is expressed as a percentage, you can quickly and easily compare the returns of various properties or investment strategies. This makes it a valuable tool for decision-making, helping you identify the investments that offer the best potential returns.

Optimizes leverage: CoC return can also help you optimize your use of leverage. By analyzing how different financing structures impact your CoC return, you can determine the optimal amount of leverage to use to maximize your returns.
Guides investment strategy: Focusing on CoC return can guide your overall investment strategy. Properties with high CoC returns often provide strong, stable cash flow, which can be particularly attractive for investors seeking steady, predictable returns.
Simplifies decision-making: By distilling investment performance down to a single, easy-to-understand metric, CoC return simplifies the decision-making process. It allows you to quickly evaluate and compare investment opportunities, making it easier to identify the best deals.

Tactics to Boost Cash on Cash Return

While CoC return provides a clear picture of your investment's cash performance, there are several tactics you can employ to boost this key metric. These strategies focus on optimizing your property's income and expenses, ultimately driving higher returns.

Increase rental income: One of the most direct ways to improve your CoC return is to increase the rental income your property generates. This can be achieved through strategic rental increases, keeping pace with market rates and property improvements. Additionally, consider adding new revenue streams such as pet rent, parking fees, or laundry services.
Reduce operating expenses: Just as increasing income can boost your CoC return, reducing your operating expenses can have a similar effect. Analyze your property's expenses and look for opportunities to cut costs. This might involve renegotiating service contracts, implementing energy-efficient upgrades to reduce utility costs, or optimizing your property management to minimize unnecessary expenses.
Utilize favorable financing: The terms of your financing can have a significant impact on your CoC return. Securing loans with lower interest rates and favorable terms can minimize your financing costs, leaving more of your rental income as net cash flow. Consider strategies such as refinancing to a better rate or exploring alternative financing options.
Invest in appreciating markets: While CoC return focuses on current cash flow, investing in markets with strong appreciation potential can amplify your total returns. As your property increases in value, you build equity which can be tapped through a cash-out refinance or realized upon sale. This appreciation effectively boosts your long-term CoC return.
Implement value-add strategies: Identifying opportunities to increase your property's value through strategic renovations or improvements can also drive your CoC return. By investing in upgrades that allow you to command higher rents or reduce operating costs, you can improve your property's net income and, consequently, your CoC return.
Maximize tax benefits: Real estate investing offers numerous tax advantages that can effectively boost your CoC return. Leveraging strategies such as depreciation, 1031 exchanges, and other tax deductions can minimize your tax liability, leaving more of your rental income as net cash flow. Consult with a tax professional to optimize your tax strategy.
Optimize property management: Efficient property management is key to maximizing your CoC return. A good property manager will work to minimize vacancy and turnover, ensure timely rent collection, and control operating costs. Whether you self-manage or hire a professional, optimizing your property management can significantly improve your bottom line.

What Role Does Appreciation Play in Cash on Cash Return?

While cash on cash return primarily measures an investment property's current cash flow performance, it's important not to overlook the significant role appreciation plays in driving long-term returns. Appreciation, or the increase in a property's value over time, can dramatically amplify your total return on investment.

Appreciation increases equity: As your property appreciates, you build equity. This equity can be accessed through a cash-out refinance, providing a lump sum of cash that can be reinvested into additional properties or used to improve your existing investments. This effectively boosts your long-term CoC return by increasing your cash flow and expanding your investment portfolio.
Appreciation drives profit upon sale: When you eventually sell an appreciated property, you realize a significant profit. This profit, when considered as part of your total return, can substantially increase your effective CoC return over the life of the investment. The longer you hold a property and the more it appreciates, the greater the potential impact on your overall returns.
Appreciation hedges against inflation: Real estate has historically been an effective hedge against inflation. As the cost of living increases, so too do property values and rents. This appreciation helps to preserve and grow the real value of your investment over time, contributing to a higher long-term CoC return when adjusted for inflation.

Investors should strategically target properties and markets with strong appreciation potential to maximize their long-term cash on cash returns. Factors to consider include location, economic growth, population trends, and development plans. By investing in areas poised for appreciation, you position yourself to benefit from rising property values and the corresponding boost to your CoC return.

It's worth noting that while appreciation can significantly enhance your long-term returns, it's not guaranteed. Real estate markets can be unpredictable, and economic downturns can temporarily stall or even reverse appreciation. This is why it's crucial to also prioritize strong cash flow when evaluating investment opportunities. A property that generates solid CoC returns from day one provides a buffer against market fluctuations and ensures your investment is profitable even in the absence of appreciation.

Ultimately, the most successful real estate investors strike a balance between immediate cash flow and long-term appreciation. By carefully selecting properties that offer both strong CoC returns and appreciation potential, you can optimize your investment strategy for both short-term and long-term success. This balanced approach allows you to enjoy the benefits of steady, predictable cash flow while also positioning yourself to capitalize on the wealth-building power of appreciation.

Is Focusing on Cash on Cash Return Worth It?

While cash on cash return is a valuable metric for evaluating the current performance of an investment property, it's important to consider the bigger picture. Focusing solely on CoC return may cause you to overlook the significant role appreciation plays in building long-term wealth through real estate.

Appreciation drives equity growth: As your property appreciates over time, you build equity. This equity can be accessed through a cash-out refinance or realized upon sale, effectively boosting your total return on investment. In many cases, appreciation can far outweigh the cash flow generated by a property, making it a critical factor in your investment strategy.
Appreciation is a key factor in wealth creation: Over the long term, appreciation is often the primary driver of wealth creation in real estate investing. While cash flow provides a steady stream of income, it's the increase in property value that truly builds significant wealth. Investors who prioritize appreciation potential in their investment decisions position themselves for substantial long-term gains.
Balancing cash flow and appreciation is key: The most successful real estate investors strike a balance between immediate cash flow and long-term appreciation. Investing in properties that offer both strong CoC returns and appreciation potential allows you to enjoy the benefits of steady, predictable income while also capitalizing on the wealth-building power of rising property values.

When evaluating investment opportunities, consider the total return potential, which includes both cash flow and appreciation. While a high CoC return is certainly desirable, don't let it blind you to the importance of investing in properties and markets with strong appreciation prospects.

In 2024, as the real estate market continues to evolve, savvy investors will need to adapt their strategies to maximize returns. This may involve exploring emerging markets with high growth potential, investing in value-add opportunities to force appreciation, or leveraging data analytics to identify properties with the best balance of cash flow and appreciation potential.

Ready to start your real estate investing journey and unlock the power of cash on cash return? Get started with Doorvest today and let our expert team guide you to the best investment properties. With our data-driven approach and end-to-end service, you can invest with confidence and start building long-term wealth.