When I first came up with the idea of blogging around CoC ROI, or Cash on Cash Return on Investment, I was more thinking from a traditional, document what this means kind of angle. But recently, I read an article which tries to disrupt the traditional thinking and I would like to make an attempt to explain it here.

Traditional

Before we get into CoC, let’s just talk about ROI first, and we will use real estate as an example. Supposed you purchase a property with a sale price of $100,000, and you expect $1,000 a month in NOI, in this case the Annual ROI is $1,000 x 12 / $100,000 = 12%.

Annual ROI = Monthly Net Operating Income * 12 / Property Price

Next, we shall bring in the CoC part. Supposed the same $100,000 property, you are purchasing it by financing it. To simplify the math, we shall use 20% down, a loan fee of $5,000 altogether, a mortgage of $500 per month, and everything else equal. In this case, the Annual CoC ROI is ($1,000 – $500) * 12 / ($20,000 + $5,000) = $6,000 / $25,000 = 24%.

Annual CoC ROI = (Month Net Operating Income – Monthly Debt Service) * 12 / (Down Payment + Fees)

Disruption

The fundamental concept of this disruption is about how you treat the $20,000 down payment. If you think about it, you did not “pay” the $20,000 to anyone, you are really just shifting $20,000 from your bank account to be the equity in the house, so you do not count that as your “investment cost.” If you buy this concept, what that translates to is a slight revision of the formula:

Annual CoC ROI = (Monthly Net Operating Income – Monthly Debt Service) * 12 / Investment Costs

With all numbers staying the same, now the calculation becomes ($1,000 – $500) * 12 / $5,000 = 120%! I do understand the ROI number here seems disproportion and probably will cause some uneasiness accepting it at first. Nonetheless, what we can continue to think about is, should we count the down payment as our cost when calculating the ROI? That is for you to determine.