When it comes to real estate investing, it is a hard task to be successful in it. Every real estate investor wants to find the best positive cash flow properties and avoid the negative cash flow ones. However, this is easier said than done. For this very reason, before committing to a cash investment, real estate investors perform various kinds of real estate investing analysis in order to find the best properties. One of the metrics a real estate investor should take in mind is the cash on cash return. Luckily for you, you have come to the ultimate guide to cash on cash return in real estate investing. We will go over various aspects of cash on cash return so you can get the best understanding possible. Questions such as: “What is cash on cash return?” as well as “How to calculate cash on cash return?” will be answered. Additionally, we will explore the cash on cash return calculator, a great helper to every real estate investor.
#1 What Is Cash on Cash Return?
“What is cash on cash return?” is the first question that needs to be tackled. Well, cash on cash return is one of the most popular real estate metrics. It is often used to calculate the income earned on a cash investment. Cash on cash return is an indication of whether or not financing a cash investment is a good idea. In other words, cash on cash return computes the rate of return on an investment property on the basis of the cash invested in it. This implies that the metric does not take into consideration any other type of financing the property such as a mortgage, loan, etc. It is hard to define what a “good” cash on cash return is. Many real estate investors are satisfied if the results fall between 8% and 12%; however, others strive for a minimum of 20%. Sure enough, as the metric considers the cash flow of an investment, positive cash flow properties rate higher than negative cash flow ones.
Probably the most essential part to learn about cash on cash return is what it computes exactly. The formula for calculating cash on cash return goes as follows:
Cash on Cash Return= Net Operating Income/Total Cash Investment
Once you know the formula for computing this profitability metric, it is time to reveal how to calculate cash on cash return precisely.
#2 How to Calculate Cash on Cash Return?
Calculating cash on cash return consists of determining all the missing values in the formula, filling them in, and arriving at the end result. In this case, you would first need to calculate the net operating income, followed by the total cash investment. In order to be more precise, let’s explore these two variables separately.
- Calculating the Net Operating Income
In order to compute the net operating income of a real estate investment property, you should first know the annual gross income. Let’s say that you own a rental property, and the monthly rent you charge is $800. Therefore, your annual gross income would be 12 x $800= $9,600. The net operating income is calculated by subtracting the costs associated with the property from the annual gross income. In case you own a positive cash flow property, the rental costs would be less than the rental income you receive, and the opposite holds true for a negative cash flow investment. In our case, the annual costs sum up to $1,000, thus the NOI equals $8,600.
- Calculating the Total Cash Investment
The total cash investment is, simply put, all the money that you have invested in the property. This may include the money that you have purchased the property with, the down payment, and the closing costs as well as the loan fees (not to be mistaken with loan payment or loan interest). In order to compute the total cash investment, you need to sum up these values. Let’s imagine that in our case they add up to $100,000.
Therefore, the cash on cash return in our case will be:
Cash on Cash Return= NOI/Total Cash Investment
Cash on Cash Return= $8,600/$100,000
CoC Return = 8.6%
This value follows between the most popularly assumed for a good CoC return values. Even though cash on cash return seems easy to compute it, when it comes to real life, investment property analysis is not as simple. Think about all the properties you would calculate CoC return for. Imagine all the values that need to be filled in and taken into consideration when doing the computation. Luckily for you, there is a tool to help you in calculating cash on cash return. This is, namely, the cash on cash return calculator.
#3 The Cash on Cash Return Calculator
The cash on cash return calculator is a type of a real estate investment property calculator. This real estate tool will allow you to compute cash on cash return accurately as well as effortlessly. This type of rental property calculator is easily accessible online, so you can use it anytime, anywhere. Mashvisor’s cash on cash return calculator will provide you with additional information besides computing the CoC return. Such information includes, for instance, pre-filled average values of the metric for the area of your choice. In addition, Mashvisor’s cash on cash return calculator provides you with the opportunity to fill in financing data for more accurate results. For example, you can put mortgage as a method of payment and set the amount and the duration as well as the interest rates. This will be directly deducted as an expense. Moreover, you can adjust other expenses as well to get the most accurate results possible.
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