Introduction

Cash on cash return is a critical metric for real estate investors, as it measures the return on their initial investment. It calculates the annual income generated by a property compared to the total cash invested, providing insights into the profitability and efficiency of an investment. In this article, we will discuss how to calculate cash on cash return for real estate investments, and why it’s essential for investors.

Calculating Cash on Cash Return

1. Determine the annual cash flow: Annual cash flow is the difference between income generated from the property (such as rental income) and expenses incurred, including mortgage payments, taxes, insurance, property management fees, and maintenance costs.

Subtract the total costs from the total income to derive your annual cash flow.

Annual Cash Flow = Total Income – Total Expenses

2. Calculate your initial investment: The initial cash invested in a property could include factors like down payment, closing costs, renovation costs (if any), and loan origination fees. Add these amounts together to determine your initial investment.

Initial Investment = Down Payment + Closing Costs + Renovation Costs + Loan Fees

3. Calculate cash on cash return: To find out your cash on cash return, divide the annual cash flow by your initial investment and multiply by 100% to express the result as a percentage.

Cash on Cash Return (%) = (Annual Cash Flow / Initial Investment) x 100%

Example:

Let’s suppose you purchased a rental property with an initial investment of $50,000 (including down payment, closing costs,

renovations). The property generates an annual income of $18,000 and has expenses amounting to $12,000 per year.

1. Calculate Annual Cash Flow:

Annual Cash Flow = Total Income – Total Expenses

Annual Cash Flow = $18,000 – $12,000

Annual Cash Flow = $6,000

2. Your initial investment is already given: $50,000

3. Calculate Cash on Cash Return:

Cash on Cash Return (%) = (Annual Cash Flow / Initial Investment) x 100%

Cash on Cash Return (%) = ($6,000 / $50,000) x 100%

Cash on Cash Return (%) = 12%

In this case, the cash on cash return of your real estate property is 12%.

Conclusion

Calculating cash on cash return helps investors make informed decisions about their real estate investments. A higher cash on cash return usually indicates a better investment opportunity. However, it’s essential to consider other factors like appreciation, market trends, location, and potential risks before investing in a property. By understanding and calculating cash on cash return, investors can make well-informed data-driven investment decisions that align with their financial goals.