For a successful real estate investing career, it’s essential to make smart investment decisions. Before you invest (not only your money but also your time and energy) in real estate, you must ensure that your investment will bring you the profits and returns you’re aiming for. Successful property investors don’t make investment decisions out of the blue – they study the market and base their decisions on a number of real estate metrics. One of these metrics is the cash on cash return, which is the topic of this article.
Keep reading as we break down what is cash on cash return and how it allows a real estate investor to make smart investment decisions for a successful real estate investing career.
What Is Cash on Cash Return?
The cash on cash return is one of the most common terms you’ll hear when becoming a real estate investor. In simple words, it is a metric that property investors use to determine the return on investment and profitability of a rental property based on the amount of cash invested. In other words, the cash on cash return will show you a percentage of the profits you can expect to make on the actual amount of money you invested in real estate (unlike the cap rate which shows how much profits you’ll make with regards to the investment property’s purchase price).
Related: Cap Rate vs. Cash on Cash Return
Calculating the Cash on Cash Return
To calculate the cash on cash return in real estate investing, property investors use the following formula:
CoC Return = Net Operating Income/Total Cash Investment
Where the net operating income (NOI) is the annual rental income minus annual operating expenses, and the total cash investment is all the cash that the real estate investor has to pay in order to purchase and operate the investment property.
Alternatively, using a cash on cash return calculator will save time and provide you with the most accurate results as opposed to calculating by hand or a spreadsheet. This calculator is part of the broader rental property calculator. If you’re looking for the best one, we recommend Mashvisor’s cash on cash return calculator! It is part of Mashvisor’s rental property calculator that not only allows property investors to compute the cash on cash return on an investment property, but it also gives them access to readily available cash on cash return data (both traditional and Airbnb) for thousands of rental properties across the US housing market.
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It’s smart to use the cash on cash return to make investment decisions because as a real estate investor, you want to make sure your rental property is bringing you the returns you want and you’re not wasting your time and money in real estate investing.
To start analyzing rental properties in your city and neighborhood of choice using Mashvisor’s cash on cash return calculator, click here!
What Type of Investment Decisions Can Investors Base on Cash on Cash Return?
Investment Property Analysis
It’s important that a real estate investor performs an investment property analysis before buying an investment property. You might think that you’ve found a profitable rental property and invest in it only to realize after a while that it’s costing you more money than what it’s making. Obviously, this is something all property investors want to avoid. This is where cash on cash return calculations come into play. Conducting an investment property analysis is basically calculating the different values that determine the profitability of the income property. One of those values is the cash on cash return! When property investors analyze rental properties based on the cash on cash return, they are able to see which one has higher chances of generating positive cash flow and a good return on investment.
Investment Property Financing
This is the main investment decision that a real estate investor should be taking based on the cash on cash return of the rental property. As mentioned, the cash on cash return shows you the expected return on investment with regards to the amount of money you actually invest. As a real estate investor, you can either pay for buying an investment property fully in cash or with a mortgage. Using the CoC return formula (or calculator), you can calculate what your return on investment will be if you invested fully in cash vs. with a mortgage. Based on the results, you can determine which investment property financing option will bring you the highest profits.
To make money from real estate investing, a real estate investor can rent out his/her income property for the long-term (traditional) or for the short-term (Airbnb). This investment decision mainly depends on the location of the investment property – some locations yield a higher return on investment for traditional rentals while others are better suited for Airbnb rentals. How does the cash on cash return play a role in making this investment decision? Property investors can estimate the expected rental income from each rental strategy using the cash on cash return calculator. Each rental strategy will generate a different rental income, and thus, it becomes easy for the real estate investor to determine the optimal rental strategy.
The rental income is an important aspect of successful real estate investing. The rental income depends on how much the real estate investor sets as a monthly rent. If your rental rate is too high, you might not find good tenants. On the other hand, if it’s too low, your monthly rental income won’t keep up with the monthly expenses, thus creating a negative cash flow – which is something a property investor must always avoid!
As you can tell, setting the right rental income rate is not easy and it’ll significantly affect your profitability and return on investment. So, how can a real estate investor decide on the rental rate? Here’s where another use of the cash on cash return calculator comes in. After calculating the necessary costs and expenses, the cash on cash return calculator provides property investors with the rental income needed for the investment property to generate a positive cash flow!
In conclusion, smart property investors calculate the cash on cash return and base their investment decisions on the results. This real estate metric ensures finding the best rental properties with the profitability and return on investment you’re aiming for. To calculate the cash on cash return and get accurate results, sign up to Mashvisor and make use of the cash on cash return calculator that is part of our rental property calculator. Click here to learn more about how we will help you make faster and smarter real estate investment decisions!
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