Cash on Cash Return in Miami Commercial Real Estate
When considering investing in real estate, it’s essential to understand the cash on cash return on CRE. Cash on cash return is a popular metric that many investors use to determine profitability.
It simply defines the annual return you make vs. the mortgage costs, if any, over the same period. It doesn’t include a calculation for future appreciation in property value during that time.
Cash on Cash Return in CRE
The Cash-on-Cash return (COCR) is a metric that tells us how much net annual cash flow is as a percentage of the overall cost of the investment over the same period. The COCR ratio is a handy way to compare your returns to comparable assets. It helps the investor make better investment judgments by comparing the data to those found in other research on the market average. The ratio allows an investor to analyze returns not only within the cash on cash return in the real estate asset class but also with other asset classes.
What the COCR Metric Doesn’t Tell You
- The return on capital is not the same as COCR. Because a return on capital is not an income, it doesn’t represent the net profit from the investment.
- The cash-on-cash return ratio calculation uses simple interest rather than compound interest. An investment opportunity with even a low compound interest rate may be a better option than one with a high cash-to-cash return.
- Calculate COCR by dividing before-tax cash flow by total cash invested. Because the ratio’s numerator represents pre-tax cash flow, it ignores the individual’s tax band and tax outflows. An individual may influence the investment opportunity tax benefits and outgo, which are not included in the return ratio, affecting the investment opportunity.
What is a Good COCR Ratio?
The exact amount required for a good COCR varies. If an 8 to 12 percent COCR is not assured, it may be best to find a better return. While some experts believe that an 8 percent return is a fair ratio, others recommend a range of 8 to 12 percent.
Conclusion
Using the COCR does not reveal the whole story about your commercial real estate property and should not be used exclusively to make an investment decision. Investing demands qualitative analysis such as property location, future possibilities, and commercial aesthetics, among other considerations.
Buying a commercial real estate investment is complex. Neglecting to consider one metric can mean the difference between success and failure.
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