Real Estate AnalysisHow to Calculate Cash on Cash Return for Any Rental Property by Nasser Mansur February 27, 2018November 7, 2018 by Nasser Mansur February 27, 2018November 7, 2018How to Calculate Cash on Cash Return for a Rental Property?Any real estate investor who invests in or owns rental properties knows how valuable it is to calculate the cash on cash return for analyzing the rental property and determining its return on investment.Before we get into how to calculate cash on cash return for a rental property, we’re going to briefly explain what the cash on cash return is and what the metric means for your real estate investment.Cash on Cash ReturnThe cash on cash return is a metric used in real estate investing to determine the value of an investment property and its returns based on the amount of cash that you as a real estate investor have put towards the purchase of the investment property and the amount of rental income that the rental property will generate. In simpler terms, the cash on cash return metric measures the percentage of the total amount of cash you’ve paid from your own money that you will be making in rental income each year.The cash on cash return is typically expressed as a percentage value. For example, let’s assume that you have an investment property with a 10% cash on cash return. This means that each year this investment property is generating a rental income that is equal to 10% of the total amount of cash you’ve invested in it.Click here to find rental properties with 10% cash on cash return or higher in your area!Keep in mind that unlike the cap rate, which is a very similar metric, the cash on cash return takes into consideration the method of financing used to purchase the rental property. If you’re purchasing an investment property with an 80% mortgage, the cash on cash return calculation will only take into account the 20% that you’ve paid in cash.Related: Understanding Cap Rate vs. Cash on Cash ReturnBut the question remains: How to calculate cash on cash return for a rental property?Calculating Your Annual Cash Flow and Rental IncomeThe first step towards answering the question of how to calculate cash on cash return is to determine your rental property’s cash flow and rental income.Annual Cash FlowThe cash flow of an investment property is the amount of actual profit that it is making after subtracting all costs and expenses for running, managing, and maintaining the property. A positive cash flow means that the property’s rental income is higher than its expenses, while a negative cash flow means that the rental income is lower than the expenses.Annual Rental IncomeIn order to know how to calculate cash on cash return for a rental property, you should first know how to calculate its annual rental income, which is a very simple task. The annual rental income of a rental property is the amount of rent that you collect from the tenants each year. This rental income is determined by you as the landlord and owner of the real estate property depending on the rental rate that you lease out the property for.One of the most important things to keep in mind when calculating your annual rental income is to account for the occupancy rate or vacancy rate of the property, which will be mentioned in more detail later in this article.Generally, assuming that a rental property has an occupancy rate of 100%, if you are renting out this property for $1,000/month, the annual rental income of this property will be $12,000 ($1,000 x 12).Calculating Your Annual ExpensesBefore knowing how to calculate cash on cash return for an investment property, you must also know how to calculate the expenses that will apply to your rental property. The costs and expenses that are related to investing in a rental property can be broken down into two main types: first-time startup costs and annual recurring expenses.Related: 11 Costs First Time Real Estate Investors Should ConsiderFirst-Time Startup CostsThe first-time startup costs of an investment property are the costs and expenses that will apply once you purchase the property.These first-time startup costs include the following:Inspections and appraisalTotal repair and renovation costsFurniture and appliancesClosing costsAnnual Recurring ExpensesThe most important expenses that you need to determine before knowing how to calculate cash on cash return for a rental property are the annual recurring expenses. These recurring expenses will take up a big chunk of your annual rental income, and they will determine whether your investment property has a positive cash flow or a negative cash flow.The main annual recurring expenses that you need to calculate in order to know how to calculate cash on cash return include the following:TaxesThe taxes that apply to your rental property should all be included in your calculations for the expenses. Taxes are among the most important expenses to account for, and they typically amount to a considerable percentage of your rental income.Maintenance CostsThe costs and expenses of maintaining a real estate property and keeping it in a good and habitable condition are another important annual expense that you should take into account when calculating the cash on cash return. Before learning how to calculate cash on cash return, you should also learn how to estimate the maintenance costs for your investment property based on the different characteristics of the property such as its age.HOA FeesHOA fees can be substantial, and they can drastically affect your rental income. If you’re investing in a rental property that is part of the Home Owners Association, then you should definitely be able to determine the exact amount of rental income that will go towards paying your HOA fees before knowing how to calculate cash on cash return.Related: How to Minimize Your Monthly Expenses in Real Estate Investing?Property Management FeesWhile not all landlords or real estate investors hire professional property management to manage their rental properties, most of them do. Property management fees are typically a fixed percentage of your rental income (8-12% on average). This means that the higher your rental income, the higher your property management fees will be.For this reason, when learning how to calculate cash on cash return, it is often advised to account for the property management fees even if you’re not intending to hire a professional property management company from the start. This is to ensure that your investment property’s rental income can afford to hire property management when the time comes without leading your cash flow to the negative side of the spectrum.Related: Real Estate Investing 101: Rental Property ManagementMortgageNaturally, if you’re purchasing an investment property using a mortgage, then the largest expense that you will have on your rental property will be your annual mortgage payments.If you know how to calculate cash on cash return, then you probably know that the amount of borrowed money for your purchase is not taken into consideration. Some real estate investors mix that up and do not include the mortgage payments in their annual expenses, which is a very serious mistake and will result in inaccurate results for your calculations.Vacancy RateLastly, the vacancy rate (or occupancy rate) of a rental property is the percentage of time in a year that the property remains vacant (or occupied). This percentage is calculated as a direct expense that will be subtracted from your rental income.For example, if a rental property that you rent out for $500/month has a vacancy rate of 20%, the amount of annual rental income for the property would be $6,000 ($500 x 12) x 80%, which is $4,800. This is before calculating any other expenses.Click here to find rental properties with readily calculated cash on cash return and expenses!How to Calculate Cash on Cash ReturnFinally, after calculating all these expenses, it’s time to learn how to calculate cash on cash return for your rental property.The formula for calculating the cash on cash return is a very simple formula:Cash on Cash Return = (Cash Flow/Cash Invested) x 100To give you an example and help you learn how to calculate cash on cash return on your own, let’s assume the following:You purchase an investment property for $200,000 using a 60% mortgage. This means that the amount of cash you’re paying for the property is $80,000. You rent out the property for $1,000/month, which is a $12,000 annual rental income.Let’s suppose the following annual recurring expenses for the property:Annual taxes: $300HOA fees: $200Maintenance costs: $500Property management: 10% of your rental income ($1,200)Vacancy rate: 20% ($2,400)Mortgage: $4,500Total annual expenses: $9,100Cash Flow = Annual Rental Income – Annual ExpensesCash Flow = $12,000 – $9,100Cash Flow = $2,900Now, let’s see how to calculate cash on cash return using the formula and these numbers:Cash on Cash Return = ($2,900/$80,000) x 100Cash on Cash Return = 3.62%This means that the rental income generated from the property, after calculating all expenses, is equal to 3.62% of the total amount of cash that you’ve invested in the property. In other words, each year you will be making profits from your investment that are equal to 3.62% of the amount of cash you’ve invested.To Sum UpIn order to know how to calculate cash on cash return for your rental property, you need to be able to determine all costs and expenses associated with owning, running, and managing the property. Additionally, you should also know the correct amount of rent that you want to set on your rental property.If you don’t know how to calculate cash on cash return, then it’s okay! You can always use a cash on cash return calculator, such as the one we have on Mashvisor, to make your life easier. Not only does Mashvisor provide you with an easy to use cash on cash return calculator, but you can also find investment properties and listings with readily calculated cash on cash return, allowing you to skip the whole calculation process and jump right into choosing the property with the most suitable cash on cash return for your investment! Start Your Investment Property Search! START FREE TRIAL Start Your Investment Property Search! START FREE TRIAL 0FacebookTwitterGoogle +PinterestLinkedin Nasser MansurNasser is an experienced content writer with a degree in English Language and Literature. He loves writing about all aspects of the real estate investing business with focus on market and property analysis and the best sources which every real estate investor needs in order to succeed. Previous Post Achieve Financial Independence with Real Estate Investing Next Post Professional Property Management Company: What Traits Should You Look For? Related Posts Are REO Properties Always a Good Real Estate Deal? Understanding the Gross Rent Multiplier in Real Estate Investing 4 Key Airbnb Investment Metrics You Should Know Tips for an Accurate Real Estate Comparative Market Analysis What Real Estate Investment Tools Do You Really Need? Where Can You Find a Positively Geared Property for Sale? 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