What is a cash on cash return calculator and why does every real estate investor need one?
Before investing your money in any type of investment, you need to evaluate the profitability of this investment first (the return on investment). This holds true for real estate investing. A smart real estate investor would never make a purchase before estimating how profitable an investment property is.
One of the most commonly used metrics that property investors use to determine the profitability and return on investment is the cash on cash return. If you’re a beginner real estate investor, you should know that this is one of the most important terms in the real estate investing business. Don’t worry, estimating the cash on cash return is not that hard – all you need is a cash on cash return calculator!
Keep reading to learn what a cash on cash return calculator is, why every real estate investor needs one, and where to find the best one
What is a Cash on Cash Return Calculator?
First, the cash on cash return is the return on investment based on the net operating income (NOI) of an investment property (annual pre-tax cash flow) and the amount of cash the real estate investor actually invested, including the purchase price, closing costs, rehab costs, and mortgage loan fees (if you take a mortgage from the bank). Here’s the formula used to compute the cash on cash return:
Cash on Cash Return = (Net Operating Income/Total Cash Invested) × 100%
Now, judging by the name, a cash on cash return calculator is a real estate tool used to make these calculations. It is a part of the broader rental property calculator. Successful property investors use this real estate investing tool to save time and get accurate results, instead of sticking to the old-fashioned way of calculating cash on cash return by hand or a spreadsheet. However, the cash on cash return calculator does more than just calculate numbers.
Why Every Real Estate Investor Needs a Cash on Cash Return Calculator
The cash on cash return calculator is the ultimate real estate investing tool because it allows property investors to:
Determine the Financing Method
The first thing that sets the cash on cash return calculator apart from other real estate investing tools is that it estimates the return on investment and profitability of a rental property taking into account the property financing method. The cash on cash return of an investment property will differ depending on whether the real estate investor purchased it with all cash or a mortgage loan.
Thus, by computing the different returns of the same investment property using different financing methods, the cash on cash return calculator allows property investors to determine which financing method yields a higher profitability.
In addition, if you’re using a mortgage loan to finance the purchase of a rental property, the cash on cash return calculator allows you to specify the amount of borrowed money, the type of the mortgage (15 years, 30 years, etc.), and the interest rate on the mortgage. This helps property investors in determining the amount of annual mortgage payback costs.
Calculate Your Expenses
Owning investment properties has a lot of expenses associated with it which affects the profitability of the investment. Some of these expenses are startup costs which property investors only pay once when purchasing the investment property (these include inspections and appraisal, total repairs or renovation costs, furniture and appliances, and closing costs). Other expenses are annual recurring costs that property investors have to pay on an annual basis (these include insurance, property management, maintenance, property taxes, and mortgage payments).
In addition, there are always some hidden costs of owning a rental property which should also be taken into consideration. These expenses have to be subtracted from your annual rental income when calculating the cash on cash return. 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, smart real estate investors use the help of a cash on cash return calculator to keep track of all these expenses and get accurate estimations of the return on investment.
Set The Rental Income
Besides the above-mentioned expenses, the rental income is another important aspect of the cash on cash return calculator. The rental income is the amount that the real estate investor who owns the rental property sets as monthly rent. Setting the right rental income is not easy and, if not set correctly, it’ll significantly affect your profitability and return on investment.
If your rental income is too high, you won’t find prospective tenants. On the other hand, if it’s too low, your monthly rental income won’t keep up with the monthly expenses, thus creating a negative cash flow – which is something property investors must always avoid!
So, how can a real estate investor set the right rental income? Here’s where another use of the cash on cash return calculator comes in. Real estate market analysis, real estate comps, and the location’s economy are all needed to determine the rental income. With this data and after calculating the necessary costs and expenses, a cash on cash return calculator provides property investors with the rental income needed for the investment property to generate a positive cash flow.
Analyze Different Investment Properties
This point does not need much explanation. As mentioned, the cash on cash return calculator is used to estimate the profitability of an investment property. Thus, a real estate investor can simply use this real estate investing tool to analyze the profitability of a number of different investment properties to find the best performing one with the highest return on investment!
Click here to search for and analyze different investment properties in any city and neighborhood across the U.S real estate market!
Where to Find a Cash on Cash Return Calculator
Looking for a cash on cash return calculator? Look no further! Mashvisor provides property investors with a cash on cash return calculator – part of Mashvisor’s rental property calculator. Our cash on cash return calculator allows you to customize and modify the different values to estimate the profitability and return on investment of a rental property and get the most accurate results.
Furthermore, it 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, click here.
Click here to start analyzing investment properties in your city and neighborhood of choice using Mashvisor’s cash on cash return calculator!
To Sum Up
Evaluating the profitability of a rental property before investing your money in it is a must for a successful real estate investing career. The cash on cash return calculator is one of the best real estate investing tools to do so. To make smart investment decisions and find the best investment properties in the US real estate market, sign up for Mashvisor and start using our rental property calculator!
Mashvisor provides state of the art real estate investment tools to help you make wise investment decisions and walk you through your investment journey. Please sign up here to start analysing the investment opportunities in both short trem and long term rental industry.