With any real estate investment in question, a successful investor will not purchase a rental property/ies without studying his/her prospects and analyzing the overall ROI.
Without careful analysis of the real estate market, the location/neighborhood, and the rental property, you cannot deduce if the rental property is worth the investment in the long run. Using key metrics to measure the profitability of a rental property is imperative to a successful real estate business long term. One of the key metrics to take into account in real estate investing is the cash on cash return (CoC), which measures the cash flow returns from rental property.
What Is the Cash on Cash Return?
The cash on cash return formula measures the overall profitability of an income property; it is based on the amount of cash that the real estate investor pays from his/her own money, leaving out the amount of money borrowed through a mortgage or a bank loan. So in other words, the cash on cash return formula takes into account your down payment only.
It is important to note that the cash on cash return metric is a quick measure to estimate what a real estate investor may receive over the life of the investment, but it is not set in stone. Use the cash on cash return metric to assess a potential real estate investment from your options.
How to Calculate the Cash on Cash Return
The cash on cash return formula = NOI (Net Operating Income)/Cash Invested
For example,
Let’s suppose you spent $1,000,000 to buy an income property from your own pocket (no debt) and your net operating income amounts to $110,000. How much is your annual cash on cash return from this investment?
CoC = 110,000/1,000,000
=0.11
=11.0%
A cash on cash return between 8%-12% is a good benchmark to keep in mind for residential real estate investing. Commercial real estate investing has higher cash on cash returns because there is higher risk incurred for the real estate investor.
Your real estate investment’s profitability is dependent on a few factors, which include occupancy and vacancy rates as well as the macroeconomic conditions.
A good location reaps a higher cash on cash return than a run-down neighborhood, but with this said, a run-down property in a prime location will experience higher vacancy and higher operating expenses that will reap you less of a profit and lower cash on cash return in the long term.
Mashvisor Will Do the Math for You
In this day and age, we want to get things done faster, better and more efficiently. And thanks to the internet, Mashvisor’s investment property calculator can streamline your research and give you better and faster results to determine whether or not a rental property will reap you good returns. You can forget about aggregating tedious spreadsheets and use Mashvisor’s analytic tools and rental property calculator to reap you higher rewards in a much faster time period for any listing in the country.
You can see readily available metrics for thousands of listings on the website i.e. cash on cash, cap rates, rental income, occupancy rate etc. Or, you can also customize/amend your own returns using the cash on cash calculator based on your incoming gross income and outgoing expenses.
Using Mashvisor, your research and calculations are automated and streamlined. Once you choose a mortgage plan and specify the amount of the mortgage, the values will automatically adjust themselves, including the interest rate, which will also reflect in your values and overall ROI. This is because changing the mortgage amount/duration/interest rates will all affect the expenses that will apply to your rental property since the mortgage payments count as an operating expense.
Mashvisor’s Rental Property Calculator
These are the three major values that you can customize and adjust using Mashvisor’s investment property calculator:
- Mortgage: Adjusting any value in the mortgage section will make changes to the expenses accordingly.
- Expenses: In addition to the mortgage being calculated in the expenses, you will also have the choice to customize other expenses, such as the taxes, bills, HOA fees, etc., which will directly impact the NOI.
- Rental Income: Automatically set to the average rental income in the area of the property type, you can also adjust the rental income to suit your desired value or the amount of rent that you intend to charge on your rental property.
All the above factors are taken into account in Mashvisor’s cash on cash return calculator for reaping accurate estimates on the overall profitability of your income property. The calculator helps investors make smarter decisions much faster.
Making Money in Real Estate
To earn high ROI on your real estate investments, make sure to invest in the right locations and conduct comparative market analysis to deduce the right investments for either traditional or Airbnb rental properties. Also, take into account the general macro-conditions before you decide to buy or sell real estate. Timing is also crucial to make money in real estate investing. Do not neglect to pay attention to what is happening in the housing market as a whole before you jump head first into your first real estate investment.
Sign up for Mashvisor’s services today to find the best deals on investment properties across the US.
Conclusion
The cash on cash return is a quick and easy metric to decipher the good real estate investments from the bad. This could be your first step in determining the potential profitability of an income property, but it should not be the only measure. Use Mashvisor’s analytical tools and rental property calculator to guarantee positive cash flow properties, reaping you high financial rewards long term.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.