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Understanding Cash on Cash in Multifamily Investing

Investing in multifamily properties can be an excellent way to generate passive income and build wealth over time. One of the most important metrics to consider when evaluating a potential multifamily investment is cash on cash (CoC) return. In this article, we’ll define what cash on cash means in the context of multifamily investing and explain how it can be used to evaluate the financial performance of a multifamily property.

What is Cash on Cash Return?

Cash on cash return is a financial metric that measures the amount of cash income an investor receives relative to the amount of cash invested in a property. It is typically expressed as a percentage and is calculated by dividing the property’s annual pre-tax cash flow by the total amount of cash invested.

In multifamily investing, cash on cash return is particularly important because it measures the income generated by the property relative to the amount of equity the investor has in the property. Unlike other metrics, such as cap rate, cash on cash return takes into account the leverage used to acquire the property.

How is Cash on Cash Return Calculated?

To calculate cash on cash return, you need to know two numbers: the property’s annual pre-tax cash flow and the total amount of cash invested. Annual pre-tax cash flow is the amount of cash generated by the property in a year after all operating expenses have been paid but before any debt service (i.e., mortgage payments) has been made. Total cash invested includes the down payment, closing costs, and any capital expenditures made to the property.

The formula for cash on cash return is as follows:

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

For example, if a multifamily property generates $100,000 in annual pre-tax cash flow and the total cash invested is $1,000,000, the cash on cash return would be 10% ($100,000 / $1,000,000).

How Can Cash on Cash Return Help Evaluate Multifamily Properties?

Cash on cash return is an important metric for evaluating the financial performance of a multifamily property because it takes into account the amount of cash invested in the property. A property with a high cash on cash return is generating a greater amount of cash income relative to the amount of cash invested, which is generally considered more attractive to investors.