In the world of real estate investing, it is essential for property investors to evaluate the profitability of investment properties before investing their money in them. Doing so will help the real estate investor find the best positive cash flow investment properties and avoid the negative cash flow ones. One of the most commonly used metrics that a real estate investor should always keep in mind to determine the profitability and return on investment (ROI) is the cash on cash return.
What’s Cash on Cash Return?
The cash on cash return is the rate of return on investment which shows property investors a percentage of the profits they should expect with regards to how much cash they actually invested. This is what differentiates cash on cash return from the cap rate. The cap rate measures profitability regardless of the financing method – all cash or mortgage – while CoC return takes this into account.
Related: Cap Rate vs. Cash on Cash Return
This will help real estate investors decide the best way to finance their investment properties. For example, say a real estate investor wants to buy an investment property and he/she is wondering which financing method will generate the best return on investment. The CoC return metric will allow him/her to calculate and compare the rate of return on investment for both options which makes it easier to decide the best way to finance the investment property!
How to Calculate the Cash on Cash Return
The CoC return is calculated by dividing the net operating income (before tax) by the amount of total cash actually invested.
CoC Return = NOI/Total Cash Investment
Net operating income (NOI) is the annual rental income minus the operating expenses, and the total cash investment is all the cash that real estate investors have to pay to make the investment property operational. This includes the amount of money to pay to purchase it, closing costs, rehab costs, and mortgage loan fees (if you take a mortgage from the bank).
What’s a Good Cash on Cash Return?
Experts in the real estate investing business still disagree on the numbers. Some say anything in the range of 8-12% of CoC return makes a good return on investment. On the other hand, others would not recommend buying the investment property if it doesn’t generate a 20% CoC return.
Mashvisor’s Cash on Cash Return Calculator
If you are looking for a real estate investing tool to make cash on cash return calculations much easier, we’ve got your back! Mashvisor’s cash on cash return calculator – a part of Mashvisor’s rental property calculator – not only allows you to compute the cash on cash return on an investment property, but it also gives real estate investors access to readily available CoC return data for thousands of investment properties across the US housing market.
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For a more in-depth guide on the CoC return, read this: Real Estate Investing 101 – Cash on Cash Return