Being in the 21st century, real estate investors now have access to a number of investment tools. While it is possible to get started in real estate investing without these tools, it’ll definitely be challenging.

Using the right tools, on the other hand, will make your life easier and increase your chances of succeeding in today’s competitive real estate business. One of these must-use tools is the cash on cash return calculator. In this blog post, we explain what this real estate investment tool is used for, how to use it, where property investors can find one, and much more!

Interested in discovering other tools that’ll help you start your real estate investing career off on the right foot? Read: 8 Must-Have Real Estate Investment Tools

Real Estate for Beginners: What Is Cash on Cash Return?

Before anything else, let’s explain what the cash on cash return is for anyone who’s just getting started in real estate investing. Basically, before you buy an investment property, you need to estimate the potential profitability of this property first. In other words, you need to find what the expected real estate return on investment is. Otherwise, you might end up stuck with an investment property that is not making you the profits you want. Calculating cash on cash return is one way of finding that rate of return.

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In simple terms, the cash on cash return is one of the real estate metrics used for property analysis. It is a percentage based value that expresses the annual rate of return of a rental property based on its net operating income (NOI) and the total amount of cash that the real estate investor paid for the purchase of the property. NOI is basically your annual cash flow before tax. So, the cash on cash return formula is:

Another real estate metric is the cap rate, which calculates the rate of return based on the current market value of the property. The cap rate formula for rental properties does not take into account the method of financing used for buying the investment property, while the cash on cash return formula does. This is why most real estate investors rely on the cash on cash return for accurate results when analyzing the profitability of rental properties.

To learn more about the difference between these real estate metrics, read Cap Rate vs. Cash on Cash Return.

Why Do You Need a Cash on Cash Return Calculator?

When looking at the cash on cash return formula, you might think it’s fairly simple and wonder “Do I really need to use a tool for calculating the cash on cash return?” Absolutely.

It might look like all you need to do is multiply and divide a few numbers but trust me, it’s a lot more than that. Moreover, we’re humans and we’re bound to make errors or forget a part of the calculations, rendering our results unreliable. Therefore, the cash on cash return calculator is a must for all property investors looking to succeed in the 2019 real estate market!

The cash on cash return calculator will not only help you in finding the rate of return on your investment. It’ll also allow you to identify the best investment property financing method, calculate your operating expenses, set the right rental income that generates positive cash flow, and much more! This real estate investment tool has everything you need to make smart decisions and maximize your profits based on accurate projections.

Related: Cash on Cash Return Calculator Tells You More Than Just Numbers

How to Use the Cash on Cash Return Calculator

In order to accurately calculate the cash on cash return for rental properties, you first need to know how this tool works. There are three main features for the calculator which are explained below in three steps:

Step 1: Determine Your Method of Financing  

As mentioned above, the cash on cash return formula accounts for the actual cash invested in the rental property. So, the cash on cash return of your property will differ depending on whether you buy it in cash or with a mortgage loan. The second financing method is the most common in real estate for beginners. However, is it the best for YOU? Calculating cash on cash return will show you the answer.

The cash on cash return calculator has a mortgage/financing field that a real estate investor has to fill out. First, you set your investment property financing method (cash or mortgage). If you choose a mortgage, you should specify the amount of down payment, the loan amount, mortgage type (15 years, 30 years, etc.), and the interest rate on the mortgage.

The information provided here helps property investors determine the amount of cash needed to invest in this property AND the amount of annual mortgage payback costs. Moreover, by playing around with and adjusting this information to match your budget and criteria, you can decide which mortgage type, loan amount, and down payment will yield a higher return on investment.

Step 2: Plug In Your Monthly Expenses

The next section of the cash on cash return calculator is the expenses part. Every real estate investor knows that owning investment properties comes with a lot of expenses that affect profitability. Successful investors are always up to date with their operating expenses to make sure that their properties are generating positive cash flow. To get accurate results for your annual cash flow, you need to subtract all expenses from your annual rental income. There are two types of expenses that come with buying a rental property:

1) One-Time Startup Costs

These are the expenses that a real estate investor will pay only once when buying an investment property. It’s important to account for these costs when doing real estate analysis and estimating your rate of return on investment. The main one-time startup costs for any property investment include:

Inspections and appraisalTotal repairs or renovation costsFurniture and appliancesClosing costs

2) Recurring Costs

These are the main operating expenses that must be considered when using the cash on cash return calculator. These are the expenses that you’ll have to pay on an annual basis for your rental property. The main annual recurring expenses include:

InsuranceUtilitiesProperty managementMaintenanceProperty taxHOA duesRental income taxMortgage payments

With all these numbers and expenses, it’s easy for a real estate investor to get mixed up and end up with inaccurate results when doing the calculation by hand. However, using the cash on cash return calculator will help you to keep track of all these expenses and get accurate estimations in no time!

As you can see, each of these expenses will have its own field for property investors to fill out. You’ll have to do your own research to determine each expense and include its value in the calculator. Moreover, since there are usually hidden costs of owning a rental property, a good cash on cash return calculator should have “Other” fields for property investors to fill out as they see fit.

Interested in finding houses for sale with a readily calculated CoC return? Click here.

Step 3: Enter the Comparable Rental Income  

The final section or feature of the cash on cash return calculator is regarding the rental income that your rental property generates. The rental income is the amount that you set as monthly rent. Setting the right amount for rent is not easy and, if set incorrectly, it’ll significantly affect your cash flow and real estate return on investment. Remember: cash flow is what you have left after calculating all rental expenses and subtracting them from your annual rental income.

So, how can real estate investors make sure that they’re buying positive cash flow investment properties? Well, there are certain factors that you need to research to determine the rental income, including real estate rental comps, the location’s economy, and market analysis. After doing your due diligence and finding the comparable rental income, simply plug it into the cash on cash return calculator.

You can choose to edit this rental income and see how it’ll affect your cash flow, cap rate, and cash on cash return!

Related: What Is a Good Cash on Cash Return?

Where to Find a Cash on Cash Return Calculator

Wondering where to find a cash on cash return calculator to start making smart investment decisions? There are a lot of companies offering this investment tool to real estate investors, but Mashvisor’s includes additional features that you might not find in others.

1. Mashvisor’s Investment Property Calculator allows you to customize and modify the different values to estimate the profitability of rental properties not only based on cash on cash return – but the cap rate and cash flow as well. Plus, it also gives you this data for your property as a traditional investment or an Airbnb investment.

2. Our investment tool shows real estate investors their annual and monthly calculations of gross revenue, total expenses, cash flow, and investment payback balance. This will help you see how your property investment will perform over the long-term.

3. Mashvisor provides you with the comparable rental income and rental expenses readily calculated based on rental comps (both traditional and Airbnb). Thus, you don’t have to worry about finding comps and doing all the work yourself! Through our valuation analysis, you’ll be sure to find profitable properties and see which rental strategy will yield a higher return on investment.

Best of all, they can still be adjusted to see what is needed to generate a positive cash flow!

4. We all know the importance of location in real estate investing. For this reason, Mashvisor’s Investment Property Calculator provides insights regarding location. This will help you identify the ideal location for your real estate property and avoid bad locations.

And of course, you can then download an easy-to-read PDF report containing all the data, insights, and stats you’ve gathered about the rental property.

Indeed, the Mashvisor Cash on Cash Return Calculator is the best one thanks to its convenience, easy use, and excellent results. So, if you are interested in doing well with a real estate investment, then start out your 14-day free trial with Mashvisor now.

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