If you are in the real estate business, then I’m pretty sure that you’ve heard of the term cash on cash return. It is important for real estate investors to evaluate the profitability of an investment before investing their money in one. The best way to figure out whether or not your investment property will generate positive cash flow and give you a good return on investment is through cash on cash return.

What is cash on cash return? How to calculate cash on cash return? What is the difference between cash on cash return and cap rate? There are so many questions that begin roaming around in your head when you hear this term. This blog post will cover all the aspects of cash on cash return so stick around and keep reading! If you have any questions or comments you would like to share, please feel free to write below.

Related: Your Complete Guide to Cash on Cash Return in Real Estate Investing

What is cash on cash return in real estate investing?

Understanding cash on cash return is not hard. Simply put, cash on cash return measures the rate of return on an investment property that you would earn based on the amount of cash you invested in the property. In other words, cash on cash return shows property investors the expected percentage of profits with regards to how much cash they put in. Of course, you’re wondering, what is the point of this?

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In real estate investing, your return on investment mainly depends on how you finance your investment property. There are many options for investment property financing that you can choose from. Someone may buy an investment property with full cash while another will purchase the property with a mortgage loan. Keep in mind, when you purchase a rental property with a mortgage, a down payment is required which is usually 20% of the rental property’s purchase price. With all the different financing options, it’s hard for investors to know what the best option is. But with our little helper, cash on cash return, you can easily decide which financing option suits you best.

So if you want to purchase a rental property but can’t decide which financing method will give you the highest return on investment, the cash on cash return metric will help you out. Cash on cash return will allow you to calculate and compare both financing options to see which one gives you the best rate of return on investment.

Related: Buy a Rental Property Using a Mortgage or Cash?

Cash on Cash Return Calculator

Cash on cash return depends on two main features: the net operating income and the total cash invested. The net operating income is the difference between the annual rental income and the operating expenses. The total cash invested is all the cash investors have to pay to own and operate an investment property. These costs may include the purchase price, closing costs, rehab costs and any mortgage fees. Here is the formula for cash on cash return:

Cash on Cash Return = (Net Operating Income/Total Cash Invested) × 100%

A cash on cash return calculator is the real estate tool property investors use to do these calculations. Real estate investment tools are used by many investors to save time and get accurate results. It’s a much more convenient way than the old fashion method of manual calculations and spreadsheets.

Why a cash on cash return calculator is needed

Besides the fact that a cash on cash return calculator saves time, it has other benefits as well. This real state investing tool helps investors in many ways such as:

1. Determine the best financing method

Like I said before, the financing method you choose will affect your rate of return on investment. A cash on cash return calculator estimates the return on investment and profitability of a rental property taking into account the property financing method (mortgage or all cash).

If you are using a mortgage loan to finance your rental property, the cash on cash return calculator will let you specify the amount of borrowed money, the type of the mortgage (15 years, 30 years, etc.), and the interest rate on the mortgage. By this, property investors can determine the amount of annual mortgage payback costs.

2. Calculate your expenses

There are many expenses that come with owning an investment property. These expenses may be startup costs or recurring annual costs. Startup costs may include inspections and appraisal, total repairs or renovation costs, furniture and appliances, and closing costs. Annual costs may include insurance, property management, maintenance, property taxes, and mortgage payments.

With all these expenses, it is easy for real estate investors to get lost in a pile of meaningless numbers. But with a cash on cash return calculator, you can keep track of all these expenses and get accurate estimations of the return on investment.

3. Setting a rental income Rate

Rental income is the income you get after setting a monthly rental rate. Setting a rental rate too high or too low can drastically affect the profitability and return on investment. With a cash on cash return calculator and real estate market analysis, property investors are given the rental income needed for the investment property to generate a positive cash flow.

Related: How To Perform A Real Estate Market Analysis

4. Analyze different investment properties

Real estate investors can simply use this real estate investing tool to analyze the profitability of a number of different investment properties to find the best performing properties.

Where can you find this real estate investing tool? At Mashvsior of course! Our cash on cash return calculator allows you to customize and adjust different values to estimate the profitability and return on investment of a rental property and get the most accurate results. Our tool also gives you access to cash on cash return data for thousands of investment properties across the US real estate market – both traditional and Airbnb!

To learn more about our product and the different tools we provide, click here.

How cash on cash return is different from cap rate

Both cap rate and cash on cash return are metrics used to measure the profitability and return on investment. The difference between both is the financing costs. While these expenses are included in a cash on cash return calculation, they are not included in the cap rate calculation. Additionally, the cap rate metric is more related to the level of risk in real estate investing. So a high cap rate can mean a high level of risk and visa versa. Cap rate measures the profitability and return on investment with regards to the purchase price of the rental property and the level of associated risks. To find out more about cap rate and cash on cash return read: Cap Rate vs. Cash on Cash Return.

What is a good cash on cash return?

This is a commonly asked question among real estate investors. The problem is that it has no concrete answer. Some would say that anything in the range of 8-12% of CoC return makes a good return on investment. While others would not recommend buying an investment property if it doesn’t generate a 20% CoC return. It all depends on the type of investment property, the location, and the current housing market conditions. Let’s take a look at an example of what would be considered “good” cash on cash return to clarify the picture.

Example: Purchasing property with full cash

You are one of those lucky people that have an immense amount of capital lying around. You find a property worth $150,000 and decide to pay the full amount in cash. So in this scenario, let’s say you are required to pay another 5% (closing costs and rehab costs). Keep in mind that this is not a set percentage and may vary from property to property. So you would have a total cost that looks something like this:

Total cash invested = property’s price+ 5% (closing costs and rehab costs)

Total cash invested = $150,000 + $7,500 = $157,500

If you charge $1,700 for rent per month, this will give you an annual rental income of:

Annual rental income= 12 x $1,700 = $20,400

According to Zillow.com, the operating expenses are typically 35 to 80 percent of the gross operating income (GOI). So let’s assume that from your $1,700 rent, your monthly expense is $612. This would mean that your operating costs percentage is 612/1,700 = 36%, which is a good estimation. Your annual operating expenses would be $612 x 12 = $7,344.  So your NOI is:

NOI = annual rental income – operating expenses

NOI = $20,400 – $7,344 = $13,056

And your cash on cash return would be:

Cash on cash return = NOI/ total cash invested

CoC = $13,056/ $157,500 = 8.2%

This would be considered a good cash on cash return for your investment property. Of course, purchasing an investment property with a loan would yield a completely different cash on cash return. You would have to take into consideration the down payment, interest loan, and debt service. If you want to see a clear example of cash on cash return for a property purchased with a loan read: What Is a Good Cash on Cash Return?

A final thought

Cash on cash return in real estate investing is a metric used to measure the profitability of investment properties taking into account the financing method. It’s important because it helps property investors determine the best way to finance the purchase of investment properties for the best return on investment. Don’t forget to check out Mashvisor’s rental property calculator to easily identify investment properties with the highest potential for profits across the US real estate market!

To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.

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