Why does my cash on cash go up when I put on less debt?
When my down payment goes from 20% to 40% the cash on cash percentages increases(example: 5% to 6%).  I guess because you have more cash in the deal then you receive more profit on that.

It always seemed your cash on cash was supposed to go way up if you leveraged up more, like only putting down 10% vs 40%.

My IRR and annualized return goes up when I put down less money...makes sense.  Am I confusing cash on cash with something else, like ROI?  Am I not thinking of this correctly?

sorry to be confusing.
[{"id": "i66oold", "text": "Is the cost of your debt (Interest rate) higher than your IRR? (Negative leverage.) Otherwise, idk.", "replies": [{"id": "i66tbfl", "text": "That\u2019s the only thing I can think of. Maybe I\u2019m reading this wrong but essentially if your cost of debt is greater than your cap rate, if you are dead set on buying the property you\u2019re better off going with little or probably no debt you see something to improve NOI.", "replies": [], "depth": 2}, {"id": "i66ujx4", "text": "nope.\n\nall my spreadsheets work this way.  i put down 50% my cash on cash will go from like 5% to like 7%.  Where as is if i put down 20%, it goes back down to like 5%, even though I have more leverage.", "replies": [{"id": "i66uwsr", "text": "Then we (Reddit, NOT me) would have to see your calculations in order to understand.", "replies": [{"id": "i66wdve", "text": "project cash flow / Total equity raise\n\n\nSo If I have a higher amount(more money in the deal) divided by the cash flow, the percentage goes higher aka cash on cash", "replies": [{"id": "i66wy3z", "text": "We'd better wait for input from others here. But isn't Cash on Cash = Project Cash Flow divided by Total Cash in Deal? (i.e. the inverse of your calculation)?", "replies": [{"id": "i66yo2a", "text": "Sorry, I just changed it.  good catch.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i66vdpu", "text": "It is all about cost of debt as mentioned in other comment. If debt is accretive, then higher coc. Otherwise your spreadsheet is wrong.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i66v7de", "text": "Cash on cash fails to take into consideration loan amortization, interest expense write offs, and appreciation.\n\nYou're only getting half the picture.", "replies": [{"id": "i67a47v", "text": "Maybe I\u2019m stupid, but I calculate my CoC as \n\nCoC % = NET profit / (equity + improvements)", "replies": [{"id": "i67djqi", "text": "What do you consider net profit, though? \n\nCoC also doesn't use unrealized gains in equity as part of the denominator. So if you cash flowed 10k and you bought a property all-cash for 100k, your CoC is 10%. Even if your property appreciated to 200k, your CoC would be 10% still since it doesn't take into consideration changes in equity. Just the amount you invested which is 100k.", "replies": [{"id": "i67e72g", "text": "Net profit is Gross rev - debt service - insurance - taxes - % for vacancy/maintenance/CapEx savings.  Denominator is down payment + improvements", "replies": [{"id": "i67hmrv", "text": "Ah. I see what you mean.\n\nWhen I said \"doesn't take into consideration\", I meant that it doesn't show you the gain in equity you gain from certain factors.\n\nLike your cash on cash could be 10% for two properties, but if one property's valued tripled over a year and the other fell in 50%, you can say that the first one performed better than the second one.\n\nFor the OP who's working in a high cost of living location, cash on cash is going to be lousy. Things are expensive and rents don't scale with the price compared to a LCOL location. Cash on cash just doesn't make sense for his investments.", "replies": [{"id": "i67hv6x", "text": "I am blessed to have started in a good state. 8% for SFH and 14 for multi family is rare, but not unheard of.", "replies": [{"id": "i67mshk", "text": "That seems pretty crazy. We're looking in the mid single digits here. Appreciation makes up for it, though. What's the appreciation like over there in more saner times (so mostly pre-pandemic)?", "replies": [{"id": "i67nf11", "text": "Honestly I couldn\u2019t tell you. I turned my first home to a rental in 2020 right before the pandemic. Have 5 doors since then. I do not know what the real estate world was like in saner times, haha. Trying to not over extend myself from being naive \ud83d\ude00", "replies": [{"id": "i67o2if", "text": "Best of luck. These last two years have been insane. Anyone and everyone could pretty much pay any price and then a few months later look like a genius when prices go up another 5%. Though the brakes look like they're slowing this gravy train down.\n\nI figure as long as I'm cashflowing and have a decent strategic reserve, everything will be fine. Even if values tank 30% next week, I'm still able to make payments.", "replies": [{"id": "i67oh9z", "text": "Yea that\u2019s kind of my mindset too. As long as I\u2019m doing plays for good cash flow (and equity building), who really cares about short term appreciation? I\u2019ll worry about that when I deleverage at retirement. \n\nJust curious? Which state are you in? I\u2019m in central Indiana.", "replies": [{"id": "i67on2e", "text": "We operate in California and Oregon.", "replies": [{"id": "i67ot2s", "text": "Damn son. You could have 3 quality properties with middle class tenants for the price of one out that way. I\u2019ve heard it\u2019s absolutely bonkers out that way right now.", "replies": [{"id": "i67qhyp", "text": "Possibly. The B-class MF properties we've been looking at have been in the 300-320k range. New construction is around 375k/unit.", "replies": [], "depth": 13}], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i66wnd0", "text": "Cash on cash is the annual cashflow divided by the amount of cash you put in.\n\nIf you've got that right, then probably the debt service is too high relative to your cash flows, i.e. DSCR is too low.\n\nAnd if your DSCR is reasonable, then there's something wrong with the model.", "replies": [], "depth": 1}, {"id": "i66y8y9", "text": "Cash on cash is how much cash is generated as a percentage of the amount you invested.    If you have more debt, then you have a higher loan payment, that Eats  into the cash you would consistently receive from rental.   Cash flow is based on actual cash after monthly expenses etc is taken into consideration.", "replies": [], "depth": 1}, {"id": "i6753ve", "text": "Cost of equity is always more costly than cost of debt so the higher equity position you have (higher down payment), the higher your expected return (cash on cash).", "replies": [{"id": "i675dqi", "text": "thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i67d616", "text": "You may be over discounting your near term, certain costs. Do you have large capex in the first couple years that you\u2019d be financing via debt? If so, lower your discount rates for these costs since they are much more certain than future cash flows.", "replies": [], "depth": 1}, {"id": "i67g0z0", "text": "The reason is, you are calculating cash on cash based on mortgage payments which include principal too. For example, if I borrow at 3.125%, my mortgage will be approx 5% of the borrowed money. So even if you are borrowing at a rate lower than your IRR, the moment you add the principal component, your cash on cash return goes down. Make all your calculations based on a interest only mortgage and see the difference to understand what I\u2019m talking about.", "replies": [{"id": "i67hl8m", "text": "Thanks!  This is it.  Completely makes sense now.\n\nI wonder why the spreadsheet I use(which I paid for, professional) chooses to leave in the principle payments.  I suppose its the most true picture and it flows into everything else.", "replies": [{"id": "i67i0bv", "text": "There\u2019s a website called dealcheck.io or something like that. You can do modeling on a few properties for free. Their math is bad in some places but mostly accurate. Try it. For free. (I got nothing to do with it).", "replies": [], "depth": 3}, {"id": "i67rb9j", "text": "an easy way to figure this out is find your loan constant and compare it to your unlevered cash on cash return.\n\nit leaves it in because you are looking at cash on cash return. you have to sell the property to realize the principal paydown.", "replies": [], "depth": 3}, {"id": "i6ao3of", "text": "you should leave in the principle payments.  This is entirely correct.  Your problem isn't the cash on cash is wrong, its that you need to better understand what it says.  It is telling you if you spend x how much cash you get back on a regular basis.  Selling the asset/refinancing it/tax savings/etc are out of the scope of that metric.  \n\nIts not wrong its just you are trying to use a rule of thumb type metric when you need to use dcf etc for get a better picture of the situation.\n\nOut of this entire question remember one thing:  \"cash on cash measures cash flow returns, not investment returns\"", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i67qt2p", "text": "your loan constant (debt service / loan amount) exceeds your unlevered cash on cash return. for a 4.5% rate loan amortized over 300 months, this is 5.6%.", "replies": [{"id": "i67rl72", "text": "cool, thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i67snud", "text": "Negative leverage. Welcome to normal interest rates. It\u2019s been 15 years\u2026", "replies": [{"id": "i67zc9y", "text": "Haha, that\u2019s crazy.  First time I\u2019ve heard of that term.   Learn something new every day.  This explains a lot, thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i688skk", "text": "Your math is wrong or the debt is too expensive", "replies": [], "depth": 1}, {"id": "i693wmc", "text": "The simple answer is that you are doing something wrong.  The longer answer would require seeing your calculations.", "replies": [{"id": "i698kvm", "text": "It\u2019s been solved.  Negative leverage was the answer.  Thanks.", "replies": [], "depth": 2}], "depth": 1}]