Cash on cash return is one of the most important metrics used to measure profitability – or return on investment – in the real estate investing business. Actually, you will rarely hear someone calculate cash on cash return, or CoC return, outside the world of real estate investments. But if you are a real estate investor, this term will definitely be a part of your daily vocabulary. So, let’s have a look at what cash on cash return is, and even more importantly, how you can plan for the best cash on cash return on your investment properties.
What Is Cash on Cash Return?
Cash on cash return is a measure of how profitable a rental property is. It simply tells you how much cash you will make compared to how much cash you have spent on your income property. This metric is sensitive to the financing method, meaning that if you have the same investment property purchased entirely in cash or with a mortgage, the cash on cash return will be different.
Related: What is a Good Cash on Cash Return?
How Is Cash on Cash Return Calculated?
To calculate the cash on cash return on your investment property, you need a simple formula:
Cash on Cash Return = Net Operating Income/Total Cash Investment
The net operating income (NOI) is the annual rental income minus the operating costs.
The total cash investment, meanwhile, is all the cash that you have paid in order to obtain your rental property and make it rentable. This includes the part of the property price paid for in cash, the closing fees, the loan fees, the rehab and repair fees, and others.
As mentioned above and as you can see from the formula, the cash on cash return depends on the financing method – cash or mortgage.
How Can You Get the Highest Cash on Cash Return?
As a real estate investor, you naturally want your cash on cash return to be as high as possible because that means that you will be making more money from your investment property for the cash that you have spent on it. To make you a successful real estate investor, let’s consider the ways to achieve high cash on cash return:
1. Choose the right location
Location is everything in real estate investing, experts say. Location is also a key factor in determining the cash on cash return on an investment property. There are these cities and neighborhoods which offer relatively cheap property prices and relatively high rents. These are ideal for real estate investors looking for high cash on cash return. So, you should be careful when selecting the place for your real estate investments.
Related: Location Location Location – Is Location Really All in Real Estate Investing?
2. Perform investment property analysis
Getting high cash on cash return starts even before buying a rental property. This means that you have to purchase an investment property which has the potential to generate big rental income while not costing a fortune. To know how much you can expect to make from your perspective income property, you have to engage in investment property analysis. This will tell you how much rental income you can expect to receive from your rental property and how much your costs associated with it will be, based on comparison with other similar rental properties in your location. The investment property analysis will allow you to calculate the net operating income, one of the two components in the cash on cash return formula.
Related: How To Do Investment Property Analysis
3. Use a rental property calculator
Another thing you can do to guarantee yourself as high cash on cash return as possible is to get and use a rental property calculator, also known as an investment property calculator. Actually this real estate investing tool will perform the investment property analysis for you, saving you lots of time and energy. Because using a rental property calculator is much faster and efficient than collecting comps on your own and calculating in spreadsheets, this tool will allow you to go through many more potential investment properties than is otherwise feasible. That’s how you will be able to select to buy the income property with the highest cash on cash return. If you are looking for the best investment property calculator for your next rental property purchases, use Mashvisor’s interactive calculator, which bases all its computations on traditional and predictive analytics.
4. Raise your rent
No worries, there are things you can do to get the best cash on cash return even after you have bought your investment property. The cash on cash return depends on the net operating income, which depends on the monthly rental income. In order to increase your cash on cash return, you have to raise your rental income. However, you can’t just raise the rent for your tenants just like this because they will leave your rental property, and you’ll be left with zero income. So you have to look for ways to increase the rent that will allow you to retain your tenants. Real estate experts recommend to do fixes and repairs around your rental property and to add new amenities to be able to raise the rent. You have to do that in a smart way. Always look for repairs and amenities which will cost you little but will make your property look much better and more attractive for tenants. Once you start offering something better than your competitors in the area, you can start charging more than they do. So, that’s one more way to increase the profitability of your investment property.
The ultimate goal of real estate investing is to make money. To get good profit from your real estate investment properties, you need high cash on cash return. As outlined above, there are certain ways to boost your profitability as a real estate investor both before and after buying a rental property. To get the desired cash on cash return on all your investments, make sure to follow the tips above. For more advice on your real estate investing business, keep reading on Mashvisor.