A cash-on-cash return in real estate is a measure of the return on investment (ROI) for a particular property, expressed as a percentage. It is calculated by dividing the annual cash flow from the property by the amount of cash invested in the property. The cash flow includes the net operating income (NOI) for the property, which is the total revenue generated by the property minus all operating expenses. The cash invested includes the down payment, closing costs, and any other costs associated with purchasing the property.
For example, if an investor purchases a property for $500,000, puts down a $100,000 down payment, and generates $40,000 in annual cash flow, the cash-on-cash return would be calculated as follows:
Cash-on-cash return = Annual cash flow / Cash invested
Cash-on-cash return = $40,000 / $100,000
Cash-on-cash return = 40%
This means that the investor is earning a 40% return on their cash investment each year. The cash-on-cash return is a useful metric for investors to assess the profitability of a particular property and compare it to other investment opportunities.
What Is Cash-on-Cash Return?
Cash-on-cash return is a metric used in real estate investing that measures the annual rate of return earned on the actual cash invested in a property. Essentially, it's a ratio that compares the amount of income generated by a property to the amount of money invested in it. This method of calculation takes into account the financing, operating costs, and all other expenses associated with owning and running a property, giving investors an accurate way to determine the profitability of their investment. Cash-on-cash return is expressed as a percentage and is calculated by dividing the annual pre-tax cash flow by the total amount of cash invested. It is a valuable tool for comparing different investment opportunities and assessing their potential for generating income and building wealth.
How to Calculate Cash-on-Cash Return
Cash-on-cash return measures the return on a real estate investment based on the amount of cash invested in the property, rather than the total value of the property. To calculate cash-on-cash return, follow these steps:
- 1Calculate the net operating income (NOI) of the property for one year. This is the annual income generated by the property minus all expenses, except for any financing costs.
NOI = Gross Rental Income - Operating Expenses
- 2Determine the total cash investment in the property. This includes any down payments, closing costs, and renovation expenses.
- 3Divide the NOI by the total cash investment to calculate the cash-on-cash return.
Cash-on-Cash Return = NOI / Total Cash Investment * 100%
For example, if a rental property generates a NOI of $20,000 for the year and the total cash investment in the property is $100,000, the cash-on-cash return would be:
Cash-on-Cash Return = $20,000 / $100,000 * 100% = 20%
Cash-on-Cash Return Calculator
The cash-on-cash return calculator is a financial tool used to estimate the return on investment (ROI) of a particular real estate property. This tool considers only the amount of cash invested in a rental property compared to the yearly cash flow generated by that property.
To use this calculator, you need to input the following information:
- 1Purchase price: The purchase price of the property youre planning to invest in.
- 2Down payment: The amount of cash youll invest upfront for the property.
- 3Loan term: The time left on your mortgage.
- 4Interest rate: The percentage that the lender will charge you for borrowing the mortgage.
- 5Gross annual income: The total amount of rental income generated by the property annually.
- 6Annual expenses: The estimated yearly cost of maintaining and operating the rental property, including utilities, insurance, property taxes, and maintenance costs.
- 7Closing costs: The fees that come with transferring the ownership of the property to you.
After entering this information, the calculator will display the cash-on-cash return. This percentage is calculated by dividing the annual cash flow by the amount of cash you initially invested.
For example, if you invested $50,000 in a property and generated $7,000 in annual cash flow, your cash-on-cash return would be 14% ($7,000 / $50,000).
This tool is helpful for real estate investors to determine the projected income they can expect from their rental property and compare it to other potential investments.
Example Cash-on-Cash Calculation
A cash-on-cash calculation is a useful tool for real estate investors to determine the return on their investment. Here is an example:
Suppose a real estate investor purchases a property for $100,000. They put a down payment of $20,000 and finance the balance with a mortgage loan at a 5% annual interest rate. After closing costs, the investor has invested a total of $25,000 in the property.
The property generates a gross rental income of $1,200 per month, or $14,400 per year. The investor incurs operating expenses of $4,000 per year (property taxes, insurance, maintenance, etc.) and mortgage payments of $5,400 per year.
The net operating income (NOI) of the property is calculated as follows:
Gross rental income - Operating expenses = NOI
$14,400 - $4,000 = $10,400
The cash-on-cash return is calculated by dividing the annual before-tax cash flow (NOI minus mortgage payments) by the total cash invested:
(Annual before-tax cash flow / Total cash invested) x 100 = Cash-on-cash return
($10,400 - $5,400) / $25,000 x 100 = 20.4%
This means that the investor is earning a 20.4% return on their investment in the first year. It is important to note that this calculation does not take into account any potential changes in property value.
Difference Between CoC & Other Return Calculations
CoC or cost of capital refers to the minimum rate of return that a company expects on an investment to justify the cost of capital. It is used to determine whether an investment or project is worth pursuing.
Other return calculations, such as return on investment (ROI) and internal rate of return (IRR) provide different perspectives on the profitability of an investment.
ROI is a ratio that measures the profitability of an investment by dividing the net profit by the total investment. It provides a simple picture of how much money an investment has made or lost.
IRR, on the other hand, is the rate at which the net present value of future cash flows equals zero. It considers the time value of money and provides a more accurate representation of the profitability of an investment over time.
Although these calculations are different, they all provide insight into the expected or actual financial return on an investment, which helps investors make informed decisions about allocating resources.
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