Extra, Extra, Read All About It!
We know you can just here the newspaper boy screaming and shouting the urgent headlines on the New York Street. This week’s headline is about cash on cash return. The most successful real estate investors know that if there is any real estate metric you need to keep a close eye on, it is cash on cash return.
Luckily for real estate investors, Mashvisor is here to provide real estate analytics galore, including cash on cash return. As a sales commercial would say: But that’s not all! With Mashvisor, real estate investors will be provided with a full investment property analysis, starting from cash on cash return all the way to cap rate.
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That’s enough of the commercial marketing, let’s get into the good stuff. Cash on cash return is just a number if you don’t understand the meaning behind it. Here, we plan to give you the break down of what cash on cash return is, and how it is important to you as a real estate investor.
Infomercial Tone: Cash on Cash Return 101
So you’re letting Mashvisor perform a property analysis, and you come across the analytic cash on cash return. The question arises of what even is cash on cash return? In dictionary words, it’s the rate of return on a real estate investment property that calculates how much cash income is earned on the money put into the transaction.
In English, that basically means knowing how much money is going back into your pocket once it’s taken out. As a real estate investor, you are going to aim at making more money than what you put into the real estate property in the first place.
That is how the game works. Choose a traditional rental strategy, put in a dollar, and work to bring it back as a crisp Benjamin Franklin within a year. Cash on cash return is one real estate analytic you can’t neglect.
Mathematical Tone: Cash on Cash Return in Numbers
The cash on cash return metric is significant in real estate investing and can be represented by the formula as follows:
As you can see, cash on cash return takes an investment property’s pre-tax value received and the pre-tax value given by the investor into account. The ratio between the cost of the investment property versus the gain from the investment property is taken into account.
Although Mashvisor is here to calculate cash on cash return for you, here is an example of how cash on cash return is calculated:
Let’s say the investment property is bringing in a cash flow of $15,098 and the initial cash investment was $130,000.
Plug in $15,098 and $130,000 into our equation-
$15,098 / $130,000 = 11.61%
You can expect for the first full year of operation based upon those numbers to get an 11.61% return.
We take into consideration the pre-tax value as we aim to measure the performance of the asset and not necessarily your tax position. Although you will want to know how it will affect you tax-wise, you want to concentrate how the particular investment performs on its own.
The Textbook Definition of a Good Cash on Cash Return
There is no set golden number that all investors abide by when it comes to looking for a ‘good’ cash on cash return. Experts have different opinions, but most can agree that an 8%-12% rate is pretty good. Each property differs from the next, along with the market, so those numbers aren’t set in stone.
As a real estate investor, you can work on aiming for those numbers, but do not be discouraged if you do not reach them. Realistically speaking, it’s rare to find actual U.S. real estate markets with those rates. It’s clear to see the U.S. housing market economy is far from textbook, so it is unrealistic to expect textbook values.
It would be a shame to miss out on buying an investment property strictly because the return rates do not fall within that range. The best real estate investments can be considered those that need a little extra blood, sweat, and tears.
What’s the Big Deal Anyway
Cash on cash return measures the return investors have made within a year in relation to how much was put down. It is a good indicator of how much money is expected to be generated from the investment property. It also gives real estate investors an estimate of how long it will take to get the cash invested back into that wallet.
Knowing how much the investment property will make provides a breakdown into what kind of business plan they will set up for the property, along with the potential cash distributed over the investment property’s life.
It Plays Up To Par
Do we hear the question, “How?” Well, here’s a quick persuasive session.
Cash on cash return gives a quick and efficient way to make a “surface” comparison between a number of investment properties. It enables real estate investors like you to determine which of several different investment properties gives the highest cash return. Although you can use a number of different formulas to evaluate your real estate property, the cash on cash equation is one of the most straight-forward.
Easy Peasy Lemon Squeezy
Unlike the cash on cash return formula, most rely on estimates which give you ambiguous calculations. Cash on cash return is considered a universal analytic, as everyone can use it. Whether you’re a beginner in real estate investing or have been doing it for years on years, it can be easily utilized. Easy here means quick, comparable, and not rocket science. Fortunately for you, a Ph.D. is not required to understand what the cash on cash return value is telling you.
A Screening Tool: Out With the Bad, In With the Good
This is a perfect screening tool. The last thing you want to do is go into full detail and evaluation of over 100 different investment property opportunities, so that is where cash on cash return metrics are utilized.
Thus, you filter your search and end up with around 10 properties to really go into further valuation beyond cash on cash return. A quick comparison always saves that precious time in the real estate world.
So Ya’ Read All About It
There you go. You have just read the headline news about one of real estate’s important metrics: cash on cash return. The most successful real estate investors will take this information and apply it to their own work ethic. That would be you. What you’re not going to do is read this blog and let it dust up on your brain shelves with those old algebra equations. That’s a big no-no.
Instead, you’re going to keep in mind, FRESH mind, what cash on cash return is and how it affects you as a property investor. This way, you are one step closer to finding the safest, low-risk investments.
With the use of due diligence we always stress upon and Mashvisor’s cash on cash return analytics, you will be on the road to making money in real estate.
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