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)
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
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:
Value – Original Purchase price) / Original Purchase Price
take a look at the ROI for the same property.
30000 / 300000 = .10 or 10%
Price (Appreciated Value): 1.25M
this example you would have a ROI of
– 1,000,000 = 250,000
/ 1,000,000 = .25 or 25%
I first asked about the difference between the two it was simply
explained to me this way.
easiest way to remember it is this…
Return on Investment
a return on the entire amount
invested (including the financed amount)
Cash on Cash
a return only on your out of pocket cash
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.