Buying a rental property is one of the best ways to make money in real estate. But in order to ensure a successful real estate investment, an investor must always evaluate the property and its profitability before buying it. One way to do so is to figure the cash on cash return. Here’s where a cash on cash return calculator comes in handy!
Keep reading as we explain what this real estate investment tool is, how it works, and how it helps property investors make the best real estate investing decisions.
What Is Cash on Cash Return?
Let’s start off by defining cash on cash return.
The cash on cash return is one of several metrics used by real estate investors to measure the rate of return on a rental property. The calculation measures the net annual income generated by a property, relative to the initial cash investment that was made to buy that property. In other words, cash on cash return tells you how much profit you are making from a certain real estate investment, based on the amount of cash you have invested in it. Here’s how to calculate cash on cash return:
Cash on Cash Return Formula:
Cash on Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
- The Annual Pre-Tax Cash Flow refers to all the cash in hand after costs and expenses are tallied.
- The Total Cash Invested refers to all the capital put into the purchase of the investment property.
Let’s have a look at a quick example to demonstrate how the cash on cash return formula is used. Say you invested $10,000 in a rental property, and the annual cash flow before tax is $1,000. Per the above formula, the cash on cash return is 10%. This means that you’ve made a 10% profit on the money you’ve actually invested in the property.
Is 10% considered a good cash on cash return for a rental property? Although there is no rule of thumb, most real estate experts tend to agree that a good cash on cash return is between 8-12%. Of course, the higher, the better as it means you are earning more from your property for the money you have invested.
What Is a Cash on Cash Return Calculator?
A cash on cash return calculator is a specific type of rental property calculator which computes the cash on cash return for rental properties quickly and efficiently. Real estate investors use this tool to save time and effort instead of calculating cash on cash return by hand or using investment analysis spreadsheets.
There are a lot of cash on cash return calculators on the market. However, no two calculators are the same. Some calculators can do much more than just calculating the cash on cash return. If you are a real estate investor looking to make profitable investment decisions and expand your real estate portfolio pretty quickly, then the cash on cash return calculator you need right now is Mashvisor’s calculator.
Mashvisor’s cash on cash return calculator can help you find the best investment properties for sale in the US. It performs an investment property analysis on all types of rental properties for sale – including MLS listings, foreclosures, short sales, bank-owned homes, and off market properties – to show you the ones with the highest cash on cash return. You can, therefore, use Mashvisor’s cash on cash return calculator to search for, analyze, and compare rental properties for sale in any city and neighborhood of your choice.
Related: Cash on Cash Return Calculator Tells You More Than Just Numbers
Let’s have a detailed look at how Mashvisor’s cash on cash return calculator works.
How Does Mashvisor’s Cash on Cash Return Calculator Work?
Mashvisor’s calculator computes the cash on cash return of a rental property in three steps, as follows.
1) Estimates Costs
First, Mashvisor’s cash on cash return calculator estimates all the costs associated with buying and renting out an investment property based on rental comps data from the local housing market. Costs generally fall into one of two categories:
- One-time startup costs: these are the costs that you only have to pay once when buying rental property, such as property price, inspection costs, repair costs, closing costs, and furniture and appliance expenses.
- Recurring monthly expenses: these are the costs that you have to pay on a monthly basis once you rent out the property, such as mortgage payments, utilities, property insurance, property maintenance, property tax, rental income tax, property management, HOA dues (if you’re investing in a condo), and cleaning fees (if you’re investing in an Airbnb rental property).
Mashvisor’s Cash on Cash Return Calculator – Expenses
2) Computes Rental Income and Occupancy Rate
Secondly, Mashvisor’s cash on cash return calculator computes the predicted rental income of the investment property in the case of both long-term (traditional) renting and short-term (Airbnb) renting. The calculator computes the traditional rental income and the Airbnb rental income based on the traditional rental rate and the Airbnb rental rate prevailing in the neighborhood where the property is located. Moreover, the rental income calculations take into account the traditional occupancy rate and the Airbnb occupancy rate in the area.
Not sure where to invest? We’ve put together a list of cash on cash return by city in the US housing market. Check it out to find the best places for rental property investment.
3) Calculates Cash Flow and Cash on Cash Return
Finally, based on the cost estimates and the forecasted rental income, Mashvisor’s cash on cash return calculator calculates how much cash flow the rental property is expected to bring, and most importantly, how much cash on cash return it will generate. The calculations include both traditional cash on cash return and Airbnb cash on cash return, allowing real estate investors to compare between the two rental strategies.
Mashvisor’s Cash on Cash Return Calculator – Rental Strategy Comparison
What Are the Benefits of Using Mashvisor’s Cash on Cash Return Calculator?
Mashvisor’s cash on cash return calculator offers many benefits for a real estate investor. Here are some of the main ones:
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Determining Your Financing Method
One important decision every real estate investor has to make when buying an investment property is how to finance it in order to generate a good return on investment: in cash or with a mortgage loan. Thanks to Mashvisor’s cash on cash return calculator, you can easily figure out which financing method works best for you. You will, in fact, be able to see which financing method yields the highest cash on cash return. Moreover, if you decide to take out a mortgage loan, Mashvisor’s calculator allows you to specify your loan amount, the amount of down payment, the mortgage type, and the interest rate on the mortgage. Any changes you make to the numbers will directly affect the cash on cash return calculations. You can, therefore, play around with the values to determine which loan amount, down payment, mortgage type, and interest rate will yield the highest return on investment for your target property.
Mashvisor’s Cash on Cash Return Calculator – Financing
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Determining Your Rental Strategy
Another important decision you have to make when buying an investment property is whether you are going to rent it out for the long-term or the short-term. Thanks to Mashvisor’s cash on cash return calculator, you can easily figure out which rental strategy works best for your target property. As we mentioned earlier, Mashvisor’s calculator estimates the cash on cash return for both the traditional and Airbnb rental strategies. As a result, you will be able to easily compare the two strategies and decide which one is optimal for your investment property.
The Bottom Line
The cash on cash return calculator is a must-have tool for any real estate investor looking to invest in rental properties today. Whether you are a beginner investor looking to buy your first rental property, or a seasoned investor searching for your next real estate deal, using this real estate investment tool will help you make the best investment decisions. Sign up for Mashvisor to get your hands on our cash on cash return calculator and find the most profitable investment properties in the US housing market.
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