A cash on cash return calculator is a digital tool used in real estate investing for calculating the cash on cash return for an investment property and determining its estimated rate of return.
There are numerous cash on cash return calculators that can be found online. However, most cash on cash return calculators are very similar, and they all include the same fields and options in order to give you the most accurate results.
There are three main segments that any cash on cash return calculator is required to have. These segments include: 1) data related to your method of financing (cash or mortgage), 2) the expenses that will apply to your investment property (startup costs and recurring expenses), and 3) the rental income (or cash flow after calculating the expenses).
But, before we get started with the different segments of the cash on cash return calculator, we’re going to briefly explain what the cash on cash return is and why it is important in real estate investing.
Cash on Cash Return
The cash on cash return is a metric used in real estate investing for determining the rate of return that an investment property will have. In simple terms, the cash on cash return is a percentage based value that expresses the annual rate of return that an investment property has as a percentage of the total amount of cash that the real estate investor paid for the purchase of the investment property.
Unlike the cap rate, which calculates the rate of return based on the current market value of the investment property, the main difference between the cash on cash return and the cap rate is that the cap rate does not take into account the method of financing used for purchasing the investment property, while the cash on cash return does. The cash on cash return metric only takes into account the amount of cash invested in the property, leaving out the amount of money borrowed through a mortgage or a loan.
Additionally, it must be noted that the cash on cash return metric is best used for rental properties, and it will provide the most accurate results when calculating it for a rental property. When used for other types of properties that are considered short-term investments, the cash on cash return metric might become less valuable as it relies on calculating values that are based on the long term.
In order to calculate the cash on cash return, there are three main aspects that need to be taken into consideration.
Cash on Cash Return Calculator Part 1: Cash or Mortgage
The first aspect or segment of any cash on cash return calculator is the method of financing used for purchasing the property. As mentioned above, unlike the cap rate, the cash on cash return only accounts for the actual cash invested in the real estate property, while the cap rate accounts for the total value of the property.
A cash on cash return calculator will have a field that a real estate investor has to fill out. This field will typically have two options: are you purchasing the real estate property using all cash or are you financing it through a mortgage?
If you’re using a mortgage to finance the purchase of a rental property, you should specify the amount of borrowed money, the type of the mortgage (15 years, 30 years, etc.), and the interest rate on the mortgage.
The information provided here will determine two main aspects of your calculation: the amount of cash invested in the property and the amount of annual mortgage payback costs which will make up the largest chunk of your expenses.
Cash on Cash Return Calculator Part 2: Expenses
The expenses section is another important part that any cash on cash return calculator must have. To get the most accurate results for your annual cash flow, all expenses need to be taken into consideration and subtracted from your annual rental income.
There are two main types of expenses that any real estate deal will have when purchasing a rental property:
- First-time startup costs
- Annual recurring costs
First-time Startup Costs
These are the expenses and costs that you will pay only once when purchasing an investment property. First-time startup costs are not included in your cash on cash return calculations but should be taken into consideration nonetheless when doing any real estate analysis for determining your return on investment.
The main first-time startup costs for any real estate investment include:
- Inspections and appraisal
- Total repairs or renovation costs
- Furniture and appliances
- Closing costs
Annual Recurring Costs
These are the main expenses that must be taken into account when calculating the cash on cash return. The annual recurring costs, as the name suggests, are the expenses that will apply to your rental property on an annual basis.
The main annual recurring expenses include the following:
- Insurance
- Utilities
- Property management
- Property maintenance
- Property tax
- HOA fees
- Rental income tax
- Mortgage payments
Each of these expenses will have its own field to fill out. Most cash on cash return calculators will have these fields empty by default, and the real estate investor will have to do his/her own research to determine each expense and include its value in the calculator.
Additionally, there are several other hidden expenses for owning a rental property that any real estate investor should take into consideration. Some cash on cash return calculators will have “other” fields to include these additional expenses as you see fit.
Cash on Cash Return Calculator Part 3: Cash Flow and Rental Income
The final part of a cash on cash return calculator is related to the rental income that your rental property has. The rental income is determined by the real estate investor who owns the rental property, and it is the amount of rent he/she they sets for the rental property.
The cash flow, on the other hand, is the amount of rental income that is left after calculating all expenses and subtracting them from your annual rental income. The cash flow of a rental property can be positive cash flow or negative cash flow. If the annual expenses that apply to your rental property are higher than your annual rental income, then the investment property will have a negative cash flow. Preferably, you will want to find an investment property with a positive cash flow which has an annual rental income that is higher than the annual expenses.
Cash on Cash Return Calculator Part 4: Putting the Pieces Together
Before putting the pieces together, let’s take a look at what the cash on cash return formula looks like:
Cash on Cash Return = (Cash Flow/Cash Invested) x 100
Fairly simple, right?
When filling out the first part that is related to your method of financing, you will have determined the amount of cash invested in the rental property.
When filling out the expenses, you will have determined the total annual expenses that will be subtracted from your annual rental income.
When filling out the annual rental income, all the pieces will come together to give you the property’s cash flow, and the cash on cash return calculator will do the rest.
To give you an example, let’s assume the following:
You purchase an investment property that is listed for sale at $200,000. You finance your purchase using an 80% mortgage, meaning that you will only be putting down 20%, or $40,000, from your own cash. You decide that you can rent out the property for $1,000/month, for a total of $12,000/year. Your annual expenses, when put together, amount to $9,500/year. This means that your cash flow is on the positive side, and it is $2,500.
Cash on Cash Return = (Cash Flow/Cash Invested) x 100
Cash on Cash Return = ($2,500/$40,000) x 100
Cash on Cash Return = 6.25%
What this means is that each year, your rental property will generate a profit that is equal to 6.25% of the amount of cash you’ve invested in the property.
Bottom Line
Now that you know what a cash on cash return calculator is, how to use it, and what the results mean, head over to Mashvisor and start analyzing investment properties based on their cash on cash return and other metrics. Mashvisor’s platform provides you with real estate data for each investment property to help you determine the return on investment based on the property’s cash on cash return, cap rate, cash flow, and other metrics used in real estate investing. Not only that! Mashvisor provides you with readily calculated metrics, as well as customizable cash on cash return and cap rate calculators that you can use when searching for an investment property.