Clarifying cash on cash return % after the first year

[FrugalSaver]

The Cash on Cash formula and % is pretty straightforward, but how does this % change year over year?

For example, in the first year, I have the downpayment, the capex to rehab / make ready the house, etc.  Then I rent the house out and compute my Cash on Cash returns based on those expenses to get to a percentage.

For me, if that % is in the 12-15% range (or hopefully even more :)), I have a deal i may be interested in.

Let's say in year 2, the rent stays the same.  Obviously the $ i have to spend on the house are probably less than the year 1 down payment and rehab costs.

How does that number change year over year? 

When people talk Cash on Cash returns, are they really speaking to the first year Cash on Cash or are they looking at it over a longer period of time? (for example, if 8 years in, I need to do a $10,000 roof replacement, that would obviously change the % for that year and for the whole ownership of the house if I'm keeping good numbers)

[sokoloff]

Cash on cash has the most relevance (and least ambiguity) for the first year. For me, cash on cash comparisons are most useful to guide the initial purchase decision.

If you want to do a year 2 cash-on-cash, I'd add up all the cash you spent in year 1, subtract the cash return you got (this yields the net cash out), add any additional cash you spent in year 2, and compare that to the cash you took in in year 2. (You still have invested whatever the net cash was in year 1. You can't claim a year 2 cash-on-cash of 200% just because you had low cash outlays in year 2.)

[NoNonsenseLandlord]

I only count the first year.  Initial investment.  It definitely gets better, but depends on how you calculate it. 

You could even say a property appreciates and your cash-on-cash return gets worse.

I assume a 10% or gross rents maintenance budget.  Even if I spend less, that stays solid.  5% for vacancy, 7% for management.

I use actual numbers for everything else.