Finding income producing assets is the main goal of many real estate investors. This is usually done by completing investment property analysis. Investment property analysis presents you with the values of different real estate metrics used to assess the performance of the income property. When buying an investment property with the purpose of renting it out on the market, many real estate investors base their decision on variables such as return on investment, cap rate and CoC return. Cash on cash return, then, as you can imagine, is one of the important values when real estate investing. However, only by knowing what is a good cash on cash return can real estate investors find positive cash flow rental properties and start making money. So, what is a good cash on cash return? Let’s explore together in the sections below.
#1 What Is a Good Cash on Cash Return: What Is Cash on Cash Return in Real Estate Investing?
Of course, we cannot explore what is a good cash on cash return, without first discussing what CoC return is in general. Cash on cash return, in its basics, is a measurement of return on investment of an income property. Landlords use the variable to estimate if specific rental properties have the potential to be profitable income generating assets. This metric computes the return rate on the basis of the cash which was invested in the property along with the generated rental income. Properties which show good return on investment results are more likely to turn into high income producing assets. Curious to learn more about cash on cash return? Make sure to read “What Cash on Cash Return for a Rental Property Can You Expect in 2018?”
#2 What Is a Good Cash on Cash Return: The Cash on Cash Return Formula
In order to find positive cash flow real estate investments, landlords should not only compute the potential rental income and rental expenses. Calculating cash on cash return is also essential. So, the cash on cash return formula is pretty simple.
Cash on Cash Return= Net Operating Income/ Total Cash Investment
However, when buying an investment property and calculating CoC return, we need to take into consideration the financing method. The financing method is important because cash on cash return estimates the value based on the cash invested in the property. It is important to take into consideration the purchasing method in order to truly estimate what is a good cash on cash return for your property. So, let’s explore the two main possibilities of paying the property price.
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Calculating Cash on Cash Return: All Cash Investment
Imagine that you want to purchase a real estate investment which costs $300,000. You would also need to pay, let’s say, 5% in closing and rehab costs. This sums up to $15,000. So, the total cash investment would be $315,000. What if you are one of the lucky few and you are able to pay all that amount in cash? Well, you calculate cash on cash return in the following way:
Total Cash Investment= $315,000
What about the NOI? You can charge rent anywhere between 0.8% and 1.1% of the property price. For instance, you can be renting out your property for $3,000. Therefore, your annual income would be $36,000. Let’s say that your rental expenses would round up to about 1/3 of your income- $12,000. Therefore, your NOI equals $24,000.
Net Operating Income= $24,000
When we know all the variables, we need to compute cash on cash return:
Cash on Cash Return= $24,000/ $315,000
Cash on Cash Return= 7.6%
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Calculating Cash on Cash Return: Mortgage Loan Investment
Of course, many real estate investors are not able to pay the full price of a property in cash right away and that is totally normal. In such cases, typically the house investor takes a mortgage loan. As you can imagine, this would also change the way you calculate CoC return as well as its final value. Let’s see how.
In order to demonstrate the difference in the payment method, we will use the same price for the property, namely, $300,000. In this case, imagine you would put a down payment of 20% in order to get the loan. This means that you will pay a $60,000 down payment. We also should not forget about the closing and rehab costs, which were previously calculated at $15,000. Therefore, the total cash investment in this situation will be $75,000.
Total Cash Investment= $75,000
When computing the NOI in this case, besides the rental expenses, we should also take into consideration the debt service. We can assume that the interest rate will be 9%. We calculate the debt service based on the amount of the property price which the loan is taken for. In this scenario, the amount would be $240,000. Therefore, the debt service would add up to $21,600. Finally, the NOI is $24,000 (rental income minus rental expenses) minus $21,600 (debt service). The NOI for this real estate investment is $2,400.
Net Operating Income= $2,400
Therefore the CoC will be:
Cash on Cash Return= $2,400/ $75,000
Cash on Cash Return= 3.2%
It is important to note that this values vary per case and so, sometimes taking a mortgage loan can actually increase the CoC return. Additionally, you can use Mashvisor’s rental property calculator to help you compute not only cash on cash return but other real estate metrics as well. Keep in mind that Mashvisor’s rental property calculator also takes into consideration the method of purchasing the income generating assets. Interested to learn more about calculating cash on cash return? Make sure to read “How to Calculate Cash on Cash Return for Rental Properties Efficiently.”
#3 What Is a Good Cash on Cash Return?
Finally, we have come to the point of discussing what is a good cash on cash return.
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What Is a Good Cash on Cash Return: What Do the Books Say?
The truth is that there is a bit of a paradigm when discussing what is a good cash on cash return. Many real estate investing books and articles state that in order to be making money in real estate, the cash on cash return value should not be below 8% to 12%. Many real estate investors don’t even engage in financing a property unless it shows a value of at least 20%. These values, however, sound nearly impossible to reach in today’s US real estate market.
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What Is a Good Cash on Cash Return: What Is the Reality of It?
The reality reveals that the US housing market is a very broad and dynamic one. The economy is developing, there are many more job opportunities and leisure activities to pursue. Moreover, people find it easier and easier to move from town to town or from one state to another. All of this adds up to the supply and demand relationship and the way tenants perceive rental properties. Besides that, the competitiveness in the market increases, which influences the perception of what is a good cash on cash return as well. Overall, we can say that a value of 4%- 5% actually can be considered as a good return on investment when renting out a property. Of course, be sure to check Mashvisor’s data in order to find the most profitable locations for your future rental properties. Want to have more info about what is a good cash on cash return? Make sure to read “What Is a Good Cash on Cash Return?”
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