Ethan On A Tangent

Evaluating Multifamily Properties: House Hacking and Cash-on-Cash Return

Ethan Tang -

Cash-on-cash (CoC) return is a cornerstone metric for evaluating multifamily properties, providing a clear view of how effectively your investment generates income. But what happens when you live in one of the units? This post dives into calculating CoC return, accounting for house hacking, and deciding whether to substitute assumed rent or adjust cash flow for your unique situation.

I'm in the depths of researching criteria for determine a good investment and have decided cash-on-cash will be the 1st one I dive deeply into.

What is Cash-on-Cash Return?

Cash-on-cash return measures the annual cash flow you earn relative to the cash you’ve invested. It’s a practical way to evaluate how efficiently your money is working, especially in the first year of ownership.

Formula:

Why It Matters

CoC return offers a quick and tangible comparison across properties and investment scenarios, helping you identify high-performing deals. It’s especially useful for investors leveraging financing, as it accounts for cash flow after debt service.

Calculating CoC Return

Step 1: Estimate Annual Cash Flow

Net Cash Flow = Gross Rental Income − (Operating Expenses+Debt Service)

Include:

  • Gross Rental Income: Monthly rent × 12 (or assumed market rent for vacant units).
  • Operating Expenses: Property taxes, insurance, maintenance, utilities, and property management fees.
  • Debt Service: Mortgage principal and interest payments.

Step 2: Determine Total Cash Investment

Total Cash Invested = Down Payment + Closing Costs + Initial Repairs + Reserves

Reserves is an interesting one because unless you like living life with no safety blanket this is "hidden cost" needed to tide over bad days.

Step 3: Plug the Numbers In

Divide the annual cash flow by total cash invested and multiply by 100 to get your CoC return.

Example: A Small Multifamily Property

  • Purchase Price: $500,000
  • Down Payment (20%): $100,000
  • Closing Costs: $10,000
  • Initial Repairs: $15,000
  • Gross Annual Rent: $60,000
  • Operating Expenses: $20,000/year
  • Debt Service: $24,000/year

Total Cash Invested:

100,000+10,000+15,000=125,000

Annual Cash Flow:

60,000−(20,000+24,000)=16,000

Cash-on-Cash Return:

16,000 / 125,000 × 100 = 12.8%

Adjusting CoC for House Hacking

When you live in one of the units, your CoC analysis changes based on how you treat the unit you occupy.

Option 1: Substitute Assumed Rent

Calculate CoC as if you were renting out your unit. For example, if your unit could rent for $1,500/month ($18,000/year), add this to the gross income. This approach evaluates the property’s investment potential independent of your personal use.

Option 2: Adjust for Reduced Rental Income

Subtract the rent from your unit to reflect the actual income generated. For example, if renting other units generates $42,000/year instead of $60,000, your cash flow and CoC return will decrease. This method provides a realistic view of your finances while living on-site.

This is the calculation I'd likely use given how competitive of a market Boston is.

Option 3: Factor in "Imputed Rent"

If you save $1,500/month by living in your unit, this is a financial benefit equivalent to "imputed rent." While it doesn’t affect traditional CoC calculations, it’s worth including in your personal ROI analysis.

I love this as it evaluates the opportunity cost (or gain) of buying vs renting.

What’s a Good CoC Return?

Benchmarks vary by market and risk tolerance:

  • 5-8%: Common in urban markets with high stability and appreciation potential.
  • 8-12%: Typical for balanced investments in mid-tier markets.
  • 12%+: Found in higher-risk or value-add opportunities.

Realistically, I'm expecting a very low cash-on-cash return especially as I dip my toes into getting exposure to real estate in such a strong seller's market.

Owner-Occupied Financing Perks: Living in the property may qualify you for better loan terms, such as lower interest rates or smaller down payments, boosting your CoC return.

Limitations of CoC Return

  1. Short-Term Focus: CoC return measures only first-year performance, not long-term appreciation or cash flow growth.
  2. Excludes Tax Benefits: It doesn’t account for deductions, depreciation, or tax-advantaged financing.
  3. Ignores Market Trends: Local vacancy rates and rent growth potential aren’t reflected.

Thoughts

For house hackers, calculating CoC return requires balancing personal and investment considerations:

  • Use assumed market rent for a pure investment view.
  • Adjust for actual cash flow to reflect your living situation.
  • Consider imputed rent as a secondary benefit.

A “good” CoC return depends on your goals. For income-focused investors, aim for 10%+. For appreciation or owner-occupied deals, lower CoC may be acceptable if other benefits compensate.