Evaluating a rental property is vital for every real estate investor. How else can you truly decide if an investment opportunity is worth it?
There are many different metrics used to evaluate investment properties. You’re bound to know of some, such as cash flow and cap rate. Another important metric is cash on cash return. This metric is helpful for all kinds of real estate investments, especially commercial and residential real estate.
So, how exactly can you compute these metrics for a property? The answer is quite simple: use a rental property calculator. Any of these data can be obtained in just minutes when you use a rental property calculator. One of these metrics, cash on cash return, will be the focus of this blog; therefore, part of the rental property calculator we will be concerned with in this blog is the cash on cash return calculator.
Let’s dive right into it. Here’s why you need a cash on cash return calculator:
What Is Cash on Cash Return?
As you can tell from the name, cash on cash return is a rate of return dealing with cash. Specifically, it is the rate of return based on the annual pre-tax cash flow and the total amount of cash invested in the rental property.
Since cash on cash return only focuses on cash relating to the investment property, other benefits are not included. For instance, real estate appreciation, tax deductions, and equity are not taken into account when computing cash on cash return. So, if you have a high cash on cash return, you’re really in for more benefits, including the ones just mentioned.
A good cash on cash return is generally within the 8-12% range. The cash on cash return you receive for an investment property can be different depending on how you purchase it. Buying the real estate property with solely cash can lead to a higher cash on cash return than buying with a mortgage, or vice versa. This all depends on the numbers associated with your property.
Related: Buying an Investment Property: Cash or Mortgage?
What Is a Cash on Cash Return Calculator?
Again, from its name, a cash on cash return calculator is a calculator that calculates cash on cash return. In reality, a cash on cash return calculator is just a part of the broader investment property calculator.
When it comes to using a cash on cash return calculator, there are many factors to consider. These factors translate to numbers that you can insert into the calculator to calculate cash on cash return. One example of these factors is the method of purchase, as previously mentioned. Generally, however, the calculator analyzes two main factors and then the factors within these factors.
Related: Investment Property Calculator for Analyzing Real Estate Investments
Breaking Down Cash on Cash Return
The breakdown begins with the two main factors that make up cash on cash return: annual pre-tax cash flow and the total cash invested.
Annual pre-tax cash flow splits to the net operating income (NOI) subtracted by the debt service. The net operating income covers many different expenses. These include gross scheduled rent, other income, operating expenses, and vacancies. Gross scheduled rent is a hypothetical number. It’s how much rental income you would earn if the rental property was always occupied. The other income simply means other types of income associated with the property, like parking fees. Operating expenses include many expenses that keep the real estate property running, like taxes and insurance. Finally, to find the vacancy rate, multiply the number of days the property was vacant by the rental rate. All these factors combined produce the net operating income. Subtract this by the debt service, which is known as the interest and principle paid on a mortgage, and you will have the annual pre-tax cash flow.
The second big piece of the puzzle is the total cash invested. This is essentially the sum of the down payment, the closing costs, and the ongoing repairs of the investment property.
Why Do You Need a Cash on Cash Return Calculator?
See all those numbers in the previous section? That’s a whole lot of number crunching, isn’t it? It would be if you didn’t use a cash on cash return calculator. This is exactly why you need to use a cash on cash return calculator. It will save you so much time and energy. If you were to do these calculations manually, it can literally take hours and hours. You would have to calculate the numbers for some figures, like the gross scheduled rent, and incorporate them into the final equation. Also, some numbers depend on current data, mainly anything relating to the market, like rental rates. This requires research, which on its own takes a long time. And let’s not forget human error. One small mistake in number crunching and the entire formula would need to be reset. To make things easier on yourself, to avoid error, and to remain updated with predictive analytics, you need to use a cash on cash return calculator.
Where Can You Find a Cash on Cash Return Calculator?
Since you know you need to use a cash on cash return calculator, this begs the question: Where can you find one? This answer is much simpler: you can find one right here, with Mashvisor! A cash on cash return calculator is simply a part of a rental property calculator, which Mashvisor has and excels in. To analyze cash on cash return, all you need to do is insert some numbers and the calculator takes care of the rest. That’s not all the calculator does. It can compute cash flow and cap rate, analyze neighborhoods, and suggest optimal property type and investment strategy depending on your investment goals.
Related: How to Use Mashvisor’s Rental Property Calculator
Paper revolutionized human communication, while rental property calculators revolutionized real estate analysis. And with rental property calculators comes the cash on cash return calculator, a powerful tool to calculate a vital metric of investment property performance. To find the best investment property based on cash on cash return and other parameters, start your rental property search with Mashvisor!
