As you speak with different investors they have their own way of looking at a potential deal. Some want to know what the cash flow is, others the COC, still others the ROI and others the IRR. Today we will be speaking about Cash On Cash (COC) vs. the Return On Investment (ROI) and what the difference is.

The short answer is the COC is a one year look at the property that only considers the cash flow. The ROI looks at the entire amount investment.

Cash on Cash (COC)

COC should only be used to look at the property’s first year of performance. The reason is your cash invested will change as you improve the property and pay down the financing. After the first year you should start looking at the IRR, which we will discuss in a future article.

Let’s look at an example:

Purchase Price: 1M

Acquisition cost: 300K

Cash Flow: 30K

COC: 30000 / 300000 = .10 or 10%

## Return on Investment (ROI)

The

most non-technical way I can say this is to use an example. I buy

something for $100 I sell it for $125 I made $25 or 25% Return on my

$100 investment.

The

ROI takes into account the entire investment amount, not just the

cash used for the acquisition. It looks at the appreciation of the

investment also. The formula for ROI:

(Appreciated

Value – Original Purchase price) / Original Purchase Price

Let’s

take a look at the ROI for the same property.

Purchase

Price: 1M

Acquisition

cost: 300K

Cash

Flow: 30K

COC:

30000 / 300000 = .10 or 10%

Sale

Price (Appreciated Value): 1.25M

In

this example you would have a ROI of

1,250,000

– 1,000,000 = 250,000

250,000

/ 1,000,000 = .25 or 25%

When

I first asked about the difference between the two it was simply

explained to me this way.

The

easiest way to remember it is this…

ROI-

Return on Investment

a return on the **entire** amount

**invested** (including the financed amount)

COC-

Cash on Cash

a return only on your **out of pocket cash**

expenses

You

may be saying to yourself right now, well wait. If year after year

I’m collecting cash flow from a property and then I decide to sell

that property what is my total return from both the sale and the

yearly cash flows. That’s a great question. To figure that out we

will need to discuss Internal Rate of Return (IRR). Next week we will

take a deeper dive into IRR and explain what it is and how to use it

to asses an investment.