Cash on cash return in real estate is one of the most important terms for real estate investors who want to start making money in real estate. One of the major concerns of real estate investors when investing money in real estate is the rate of return you could receive from the property. Will the rate of return from your investment be equal or maybe even better than other investments in the market? Cash on cash return in real estate is an investment measurement that could answer that question.

Cash on cash return in real estate is definitely not just a number, it is actually a measurement and an indicator of whether a certain real estate investment is lucrative or not. This blog discusses the importance of cash on cash return in real estate alongside other aspects related to it.

What Is Cash on Cash Return in Real Estate?

Whether you are a residential real estate or commercial real estate investor, you will have to understand what cash on cash return is. In a nutshell, cash on cash return in real estate is money in versus money out. If you put a certain amount of money down, how much money will you get back (after expenses) each year? The CoC return will tell you.

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Hence, cash on cash return is an indicator of whether financing a certain investment is a good idea or not. Cash on cash return in real estate considers the relationship between the cash invested and the cash flow of a property. It is actually the ratio of a property’s annual net cash flow and the total cash investment. In fact, real estate investing and property analysis requires more than just one ratio as you need to deal with “the numbers” and cash on cash return in real estate is a number that will definitely cross your way when analyzing investment profitability.

What is the difference between cap rate vs. cash on cash return? Check out Cap Rate vs. Cash on Cash Return.

How to Calculate Cash on Cash Return in Real Estate

In real estate, cash on cash return calculates and measures the annual return that the real estate investor makes on the property in relation to the down payment and other initial costs. Cash on cash return in real estate is calculated as follows:

Cash on Cash Return = Annual Dollar Income/Total Dollar Investment

Cash on cash return actually uses pre-tax inflows received by the investor and the pre-tax outflows paid by the investor.

Example:

Let us suppose that Tom found a house that is valued at $100,000 and he purchased it for $90,000. Tom is looking at a 20% down payment with some other closing costs, so he is looking probably at about $20,000 total out of pocket. Let us also assume that this investment property has a mortgage of $700 a month (including your principle, taxes, interest, and insurance that go into the house/property). Tom rented out this house for $1,000 a month and uses $500 in repairing the house per year. These numbers look like the following:

Value: $100,000

Purchase Price: $90,000

Down payment + closing costs: $20,000

Mortgage: $700/a month

Lease: $1000/month

Repair costs: $500/a year

Out of all these numbers, what is cash on cash return? In other words, what is the money in vs. the money out?   

So, between the thousand dollars a month for lease and the seven hundred dollars for mortgage a month, there is a cash flow of $300.

Cash flow per year = 300*12 = $3,600

Let us find the annual rent for eleven months, assuming that we have one month of vacancy:

3,600-300 =  $3,300

Now let us subtract $500 (Repair costs per year)

3,300 – 500 = $2,800

What is the cash on cash return in this case?

Remember that we have $20,000 as a down-payment so the cash on cash return will look like the following:

2,800/20,000 = 0.14*100% = 14% which is the annual cash on cash return in this case.  

As you notice from the example above, in order to calculate cash on cash return, you should involve different figures in order to come up with the result and hence evaluate the profitability of a certain property. Do not get intimidated by the different numbers you see in the previously mentioned example. A big part of being a successful real estate investor is to know the numbers and calculate them. If you know how to calculate cash on cash return in real estate, you will be able to make good decisions before you even buy an investment property.  

Ideally, the higher the cash on cash return is, the better and more lucrative the investment property is.

Are you wondering about what is a good cash on cash return in real estate? Make sure to check out What Is a Good Cash on Cash Return?  

How Can Mashvisor Help?

Calculating cash on cash return in real estate can be a bit intimidating and needs time and effort. Mashvisor’s cash on cash calculator is there for you. Besides calculating capitalization rate and cash flow, Mashvisor’s rental property calculator also calculates cash on cash return. Moreover, this calculator gives you access to readily calculated and accurate data for real estate properties on both the property and neighborhood level. This feature of Mashvisor’s rental property calculator allows you to analyze and compare cash on cash return data for a countless number of investment properties across the US real estate housing market. The data is available for both Airbnb and traditional rental properties.  

Do you want to know more about our cash on cash return calculator? Make sure to read Mashvisor’s Rental Property Calculator: A Guide for Beginner Real Estate Investors.

Bottom Line

Cash on cash return in real estate is absolutely not just a number. It is actually the main indicator of the profitability of a certain real estate property. This means that this figure affects your real estate investment decisions and enables you to get the best real estate investment properties.

To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.

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