Buying a rental property can be a lucrative venture but also involves some level of risk. That’s why savvy investors conduct a thorough investment property analysis before they purchase a rental property so as to minimize risk and maximize return. They do this by carefully crunching the numbers. One key metric that property investors use to determine whether a real estate investment will be profitable is cash on cash return. Most investors use the cash on cash return formula as a key part of their investment analysis but go about it differently.
In this article, we’ll show you why it’s no longer necessary to memorize the cash on cash return formula. But before we dive into how best to calculate cash on cash return, it’s vital to have a sound understanding of the formula.
What Is the Formula for Cash on Cash Return?
Cash on cash return (CoC return) is a metric that measures the annual pre-tax cash flow generated by an investment property relative to the total initial cash invested, expressed as a percentage.
The cash on cash return formula is as follows:
Cash on Cash Return = Pre-Tax Cash Flow/ Total Cash Invested × 100%
You should note that, unlike the cap rate formula, the cash on cash return formula includes debt service as an expense. The cash on cash return formula is typically used by real estate investors who are financing their investment property with a mortgage loan.
Cash on cash return is one of the key return on investment metrics used to quickly compare the potential returns of multiple real estate investments. However, there’s no cut and dry answer for what constitutes good cash on cash return. It depends on the investor and other factors such as location and type of property. For example, the average cash on cash return in the Las Vegas real estate market is currently 2.3%. Anything above that would be better in this particular market. However, it’s generally recommended that you find an investment property with a CoC return of 8% to 12%.
How Do You Calculate Cash on Cash Return?
Traditionally, real estate investors manually calculated cash on cash return using the cash on cash return formula. However, if you are analyzing multiple properties, calculating cash on cash return manually using the formula or using a real estate investment analysis spreadsheet can be very time-consuming, to say the least.
You shouldn’t be deceived by the simplicity of the cash on cash return formula. There’s a lot of work that goes into gathering property data before calculating cash on cash return.
Fortunately, there’s a more efficient way to do it – using Mashvisor’s cash on cash return calculator. You don’t have to spend weeks or months collecting property data if you use this tool. You also don’t have to memorize the formula or use an Excel spreadsheet.
The calculator enables you to accurately conduct your investment property analysis in just a matter of minutes for both MLS listings and off-market properties in the US. It’s one of the most important real estate investment tools you should have.
Related: This Is How Not to Calculate Cash on Cash Return for Investment Properties
Why Do You Need Mashvisor’s Cash on Cash Return Calculator?
Mashvisor’s cash on cash return calculator is a specific investment property calculator that real estate investors can use to find the best investment properties for sale in any US real estate market.
While there are several cash on cash return calculators in the market that eliminate the need to memorize the cash on cash return formula, Mashvisor’s is the best because it does more than just compute CoC return.
Here are the key benefits of using Mashvisor’s cash on cash return calculator:
Related: Why Mashvisor Has the Best Cash on Cash Return Calculator 2020
1. Computes Key Real Estate Metrics
Mashvisor’s cash on cash return calculator makes things easier for you since it allows you to compute the following:
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Cost Estimates
One of the key numbers you need to calculate cash on cash return for rental property is the rental property costs. However, getting these numbers can be a daunting task. It requires a lot of research and complex calculations. In the past, when investors relied on the cash on cash return formula and real estate analysis spreadsheets, you had no option but to do all the work by yourself.
Mashvisor’s cash on cash return calculator saves you all this hassle by providing cost estimates (one-time start-up costs and recurring monthly expenses). The cost estimates are based on rental comps. This interactive tool also allows you to add custom expenses.
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Rental Income and Occupancy Rate
Rental income is also a key number for calculating the cash on cash return of an investment property. Again, with Mashvisor’s calculator, you don’t have to find numerous rental comps to estimate rental income.
The calculator uses big data, predictive analytics, and machine learning algorithms to analyze rental comps and provide an accurate projection of the rental income that an investment property will generate.
The forecast is for both Airbnb rental income and traditional rental income. The forecasted rental income takes into account the prevailing traditional and Airbnb rental rate and traditional and Airbnb occupancy rate in the neighborhood.
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Cash Flow
Savvy real estate investors don’t rely on only one metric to analyze investment properties. Generally, it is recommended that you invest in positive cash flow properties particularly if you are still a beginner. This means that you need to calculate the potential cash flow of an investment property before making a purchase.
Our cash on cash return calculator makes things easier for you since it also works as a cash flow calculator. It will calculate the expected cash flow based on the estimated costs and rental income.
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Cash on Cash Return
As the name suggests, the cash on cash return calculator will calculate cash on cash return. Again, this is based on the estimated costs and rental income. If you want to find high cash on cash return properties for sale, this is a must-have tool.
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Cap Rate
Mashvisor’s cash on cash return calculator also computes the expected cap rate, another important return on investment metric. This metric will also help you make better investment decisions.
2. Helps You Determine the Best Financing Method
Mashvisor’s cash on cash return calculator does much more than simply compute cash on cash return and other key metrics. One unique feature that makes it the best is that it has a built-in mortgage calculator that helps you to easily figure out the best financing method for you.
You can play around with different mortgage details (loan amount, mortgage type, down payment, interest rate, loan term) to determine which loan option will yield the highest return on investment.
3. Determine Optimal Rental Strategy
Knowing the optimal rental strategy for an investment property is vital if you want to maximize your returns.
Mashvisor’s cash on cash return calculator provides cash on cash return values for both Airbnb and traditional strategies. This makes it easier for you to determine the most profitable rental strategy. If you have a preferred rental strategy, you’ll be able to determine the best investment property for it.
Related: Cash on Cash Return Calculator Tells You More Than Just Numbers
The Bottom Line
The cash on cash return formula is one of the key formulas that rental property investors can use to evaluate the profitability of an investment property. However, simply memorizing the formula isn’t enough to quickly, accurately, and effectively analyze rental properties for sale. Work smart by using Mashvisor’s cash on cash return calculator.
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