The best real estate investments are those that generate a high rate of return, cash on cash return, and consequently a positive cash flow. Calculating the cash on cash return makes for one of the best real estate investment tools out there. The cash on cash return shows real estate investors the ratio between an investment property’s cash flow in a particular year and the amount of initial cash invested. Although calculating cash on cash return is a simple process, the cash on cash return calculator has been found to help real estate investors to accurately enumerate and account for all variables and fees.
The cash on cash return calculator will evaluate investment properties, rental properties, and income properties while taking into account mortgage, operating expenses, and rental income. In this article, we will tell you more about the cash on cash return calculator and the abundance of features that you can use to assist you in evaluating an investment property.
As we delve further into the explanation of the cash on cash return calculator, we will explain what the cash on cash return is, what a good rate is, and why you and all real estate investors should consider using the cash on cash return calculator.
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What Is Cash on Cash Return?
Remaining as one of the most valuable financial metrics used to evaluate real estate investments, the cash on cash return is considered relatively easy to understand. The cash on cash return is a rate of return that calculates the cash income earned on the cash invested in a rental property. The cash on cash return formula is
Cash on Cash Return = Net Operating Income / Total Cash Invested
The Net Operating Income (NOI) is simply the annual rental income minus the operating expenses. When calculating the Net Operating Income (NOI), make sure to include in your calculations gross scheduled rent, other income, operating expenses, and vacancies. The total cash invested is all the cash that real estate investors have to pay in order to make rental properties operational.
While we advise that you use a cash on cash return calculator to assess the profitability of an investment property, below we will do the calculations by hand to help you understand the essence of cash on cash return and what factors or variables are required for its calculation.
Using All Cash as Your Financing Method to Pay for an Investment Property
Let’s say you want to buy a rental property that costs $250,000. Although, you will rarely find real estate investors who pay the full amount in cash, let’s assume so. Upon purchasing the property, you incur about 5% of the property price in closing and closing costs or $12,500.
So, total cash invested = $250,000 (property price) + $12,500 (rehab and closing fees) = $262,500
Say you will be charging a monthly rent of $2,500, so your annual rental income will then be $30,000. Now that we have calculated annual rental income, we can calculate the Net Operating Income. Let’s estimate the operating expenses at a third of the annual rental income which makes a fair assessment. Net Operating Income would then be ($30,000 * (2/3) = $20,000).
The cash on cash return = $20,000/$262,500 = 7.6%
Related: Cash on Cash Return Calculator Tells You More Than Just Numbers
This means that each year, your rental property will generate a profit that is equal to 7.6% of the amount of cash you have invested in the property. What makes a good cash on cash return? Experts disagree on the numbers. However, anything between 8-12% or above is good. It is important to note that the cash on cash return also varies from one kind of property to another. And from one method of financing to another!
Using Mortgage as a Financing Method to Pay for an Investment Property
To be realistic, paying $262,500 full in cash is not a plausible option to consider. In fact, rarely do real estate investors pay for an investment property full in cash. Now, let’s take an example of the CoC calculation if you finance your investment property using a mortgage.
You are buying the same investment property from the example above but now you are using a mortgage. So, you pay 25% in cash as down payment of the property price ($250,000 * .25 = $62,500). Total cash invested would be 25% cash in down payment and 5% of property price for rehab and closing fees.
So, total cash invested = $62,500 (25% of property price paid in cash as a down payment) + $12,500 (rehab and closing fees) = $75,000.
The Net Operating Income as calculated in the previous example (assuming 2/3 of annual rental income) would be $16,800. But wait! Because you are using a mortgage, you must calculate and subtract debt service from your Net Operating Income. Assuming an 8% interest loan, the debt service would be = 8% * $187,000 = $15,000.
Net Operating Income = $16,800 – $15,000 = $1,800
Then, Cash on Cash return = $1,800/ $75,000 = 2.4%
While you can calculate the cash on cash return using pen and paper, the cash on cash return calculator omits any error or miscalculation that you might incur. Successful real estate investors nowadays prefer using the cash on cash return calculator as opposed to doing it by hand to save time and enjoy accurate results.
Cash on Cash Return Calculator
The cash on cash return calculator is a valuable real estate investing tool that many real estate investors continue to resort to. Not only will the cash on cash return calculator compute the cash on cash return of an investment property, but it can also help you determine your rental strategy and financing method to be used. Mashvisor’s cash on cash return calculator – as part of Mashvisor’s investment property calculator – allows you to customize and modify your search criteria to estimate the profitability and return on investment of a rental property while providing you with the most accurate results. Mashvisor’s cash on cash return calculator also gives you access to readily available cash on cash return data for thousands of investment properties in locations of your choosing. To learn more about our product, click here.
Related: The Cash on Cash Return Calculator: The Ultimate Real Estate Investing Tool!
Why Use a Cash on Cash Return Calculator, Particularly Mashvisor’s Cash on Cash Return Calculator?
- Real estate investors have many variables and factors to take into account when selecting a property, which can be quite time-consuming. The cash on cash return calculator saves you plenty of time by doing all the calculations for you.
- The cash on cash return calculator allows you to compare properties to others in order to identify the best ones that generate the highest return on investment.
- A cash on cash return calculator can help real estate investors estimate expected rental income from each rental strategy. Whichever rental strategy you choose, whether short term rental properties (Airbnb) or long term rental properties (traditional), the cash on cash return calculator will help you tailor your needs accordingly and find a property/rental strategy to bring about the highest return on investment.
- As you use the cash on cash return calculator, you will be able to determine the best method for financing your income property. Whether using equity or debt, Mashvisor’s cash on cash return calculator will provide you with exhaustive data. If per se, you decide to finance your investment property using a mortgage, the cash on cash return calculator allows you to play around with the down payment level, the loan amount, the loan type, and the interest rate. Same goes for paying fully in cash. The cash on cash return calculator will compute the return on investment based on the amount of cash you will have paid.
- Finally, the cash on cash return calculator allows real estate investors to analyze the profitability of an income property by calculating its rental income and estimated monthly expenses. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Putting It All Together
Are you a savvy real estate investor who is keen on making the best decisions when investing in real estate? Then we recommend that you resort to Mashvisor’s cash on cash return calculator as it will help you determine the profitability of a rental property regardless of your rental strategy. Not only will the cash on cash return calculator save you a lot of time providing you with a wide range of data, it will help you compare properties while providing you with the most accurate results. To learn more about rental strategies and Mashvisor’s cash on cash return calculator, visit Mashvisor.