When examining various investment opportunities, investors implement a variety of measures. Metrics such as cap rate, internal rate of return (IRR), and cash on cash return enable investors to compare the options available to them quickly.
Cash on cash return is a straightforward – and incredibly effective – financial formula that real estate investors employ on a regular schedule. For real estate investors, cash on cash return measures the amount of net cash flow generated by property as a proportion of the total sum of money invested.
Cash on cash, often known as CoC or CCR, is always expressed as a percentage and can be used to assess the potential returns of various real estate investments swiftly. However, how can you know what is a good cash on cash return? In this article, we will cover everything you need to know to keep the money coming!
What Is Cash On Cash Return?
A cash on cash return is a simple concept because it is just the cash you receive each year on the money you invested in a property. It differs from your return on investment (ROI) in that ROI considers the entire investment, even debt. Here’s how to figure out if you have good cash on cash return.
For example, the cash on cash return formula when buying rental property goes as follows:
[Net Operating Income (NOI) / Total Cash Invested] x 100% = Cash on Cash Return
Firstly, determine your NOI, or net operating income, generally known as your annual pretax cash flow. After deducting your rental expenses, this is the amount of cash you generate from your traditional or Airbnb rental property. A lot of estimation is involved at this stage, so be cautious and economical with your estimates.
Secondly, divide your NOI by the entire amount of money you invested. It includes a down payment, closing charges, and any repairs that must be performed on a rental property before it can be rented. Your cash on cash return will be presented in this final calculation.
To give you an even more clear example of how you can see if you have good cash on cash return:
Assume you buy a $100,000 rental property as a possible investment. You place a 20% down payment on a mortgage and spend $5,000 for closing costs for a total cash down payment of $25,000 in the sale. Your net operating income, or pretax profit after deducting operational expenses and rental income, is $3,000 each year. To calculate your cash on cash return, divide $3,000 by $25,000 to get a 12% return.
You would have $105,000 cash in the purchase if you did not mortgage the house, but your NOI would be bigger since you would not have debt service obligations. Suppose that this resulted in an annual NOI of $8,500. Divide $8,500 by $105,000 to get an 8% cash on cash return. If you have one-time capital or other major expenses, such as repairing a roof, your cash on cash return may change throughout your holding period.
Related: The Ultimate Cash on Cash Return Calculator
Why Is It Important?
When assessing a deal’s prospective profitability, cash on cash returns are critical. The metric can be an excellent approach to predict how an investment will do and, as a result, help you decide whether or not to invest. A good cash on cash return can also steer investors in the proper direction when it comes to financing, such as when deciding between a regular mortgage and a private lender. The cash on cash returns calculation may tell which path will maximize your annual returns.
Most investors compare different investment assets using cash on cash returns. By comparing this indicator across properties, investors can have a better understanding of how each one will affect their portfolio. Investors can receive a consistent view of the long-term prospects of multiple assets by depending on cash on cash returns as a comparison.
What’s a Good Cash On Cash Return?
Until we can address the issue of what is a good CoC return in 2022, a few other aspects must be considered. For example, the cash on cash return on short-term rental properties and traditional investment properties will differ – sometimes dramatically even within the same market.
An additional thing to remember is that the average city-level cash on cash return is not always the same as the cash on cash return for a single rental property. Many criteria determine a good CoC return for a specific income property for sale. The house’s value, the specifics of your financing, the marketing plan you will use to attract renters, and the rent you will be able to charge are just a few examples.
The percentages are pretty impressive by most investing standards, particularly if you can leverage the home with a mortgage and consider the typical stock market return of roughly 8%. However, you’ll want to aim for a considerably larger cash on cash return to put in the effort of obtaining the property, managing it, and adding value to it acceptable over time. Your good cash on cash return also does not account for future property change in the value over time, which influences your overall ROI.
Your capacity to have a good rental income is mainly determined by the market you invest in and the type of asset you purchase. Class C and D assets, which are older properties in less desirable neighborhoods, tend to provide higher cash on cash returns than properties in highly desirable regions with high sale prices that necessitate more cash for the transaction.
Class C and D properties frequently require work but can add value by filling tenant shortages or raising rates. However, such asset classes are significantly riskier and involve additional complications.
In the end, both Airbnb cash on cash return and traditional cash on cash return were good in 2021. According to Mashvisor’s nationwide real estate data, both categories of the US rental market will have good cash on cash return in 2022. However, the traditional housing market has shown to be the healthiest throughout the pandemic.
At the city level, investing in real estate can provide a cash on cash return ranging from 1.17% to 8.17% for traditional investment homes. A reasonable rate of return regarding traditional investments in 2022 will be anything above 3.5%. The range for Airbnb investment property cash on cash return is also relatively broad at the city level, ranging from 1.11% to 9.35%. Good cash on cash return for Airbnb is projected to be 5% or more in 2022.
Related: The Only Airbnb Estimator You Will Need
How to Calculate Cash on Cash Return in a Few Minutes?
Now, if you don’t want to spend days and days calculating every single metric there is for your rental property investing, we have a smart solution.
The Mashvisor Cash on Cash Return Calculator can help investors determine the profitability of an investment property. The Investment Property Calculator investigates an investment property thoroughly and provides users with dependable and exact real estate data analytics, such as:
- Return on investment
- Positive cash flow
- Cap rate
- Cash on cash return
- Occupancy rate
- Rental income
Mashvisor eliminates the need for you to perform your own research – we handle it all for you at a low cost. Our website provides you with access to over 450,000 listings, and 15 minutes of research can provide you with all the information you need to buy your future home!
Mashvisor Provides Investors Access to Hundreds of Thousands of Property Listings, Helping Shorten Their Research Process
How Is Cash On Cash Different From Other Metrics?
We’ve already covered how to determine cash on cash and why it’s important. Let us now examine some more common real estate financial measures used to analyze asset performance.
Net Operating Income (NOI)
Projected net operating income (NOI) is computed by deducting all planned property operational costs, such as landscaping, utilities, upkeep, and a vacancy allowance, from the maximum potential income generated by a property when fully leased. When computing NOI, debt service is not included as a cost, whereas cash on cash consists of the debt service expenditure.
Cap Rate
The capitalization rate, or cap rate for short, is used to compare the returns of comparable properties in the same marketplace. The cap rate is calculated as NOI / Market Price (or Current Assessment) = Cap Rate Percent. For example, the cap rate is 6% if the market price of a property is $1,000,000 and the NOI (before debt payment) is $60,000.
The cap rate method can also be used to calculate the house’s market value depending on the NOI and cap rates of comparable homes by modifying the equation. It can also be used to calculate the NOI based on the requested price of a property and the market cap rate, but this is a less usual application because the value should stretch to meet the market based on the existing NOI.
IRR
Internal rate of return calculates an investor’s all-in annualized percentage return depending on all net cash flows received throughout the course of the investment. Time is money, particularly when it comes to real estate investing. In principle, the longer an investor’s money is held, the lower the IRR and the poorer the investment performs.
The formula for calculating IRR is complicated and involves the use of a financial calculator, an Excel spreadsheet, or a specialist calculator found via a Google search.
ROI
Return on investment compares the value of an asset to its price. The ROI formula is (Current Market Value – Cost of Investment) / Cost of Investment. If a property provides revenue or is owned for more than a year, investors should consider such factors when calculating the return on investment to get a more accurate picture of the ROI.
Good Cash on Cash Return by City in 2022
Let’s look at the cash on cash return per city in 2022 for both traditional and Airbnb rental strategies. The following data is based on Mashvisor’s real estate market analysis and reflects the performance of actual rental listings. So, if you’re looking for investment options with high traditional cash on cash returns, take a look at the cities listed below.
- Flovilla, GA: 5.82%
- Trumann, AR: 5.47%
- Perryville, AR: 5.32%
- North Canaan, CT: 5.29%
- South Windsor, CT: 5.26%
- Hinton, OK: 5.21%
- Carterville, IL: 5.18%
- Pine, AZ: 5.16%
If your investment objectives include a high Airbnb cash on cash return, you should choose the following US cities this year:
- Coventry, CT: 8.35%
- Ledyard, CT: 8.12%
- Fairbanks, AK: 7.78%
- White Hall, AR: 7.73%
- Anniston, AL: 7.42%
- Lumberton, NC: 7.37%
- Alabaster, AL: 7.31%
- Maywood, CA: 6.44%
Related: 5 Steps to Conducting an Accurate Rental Market Analysis
Conclusion
When researching properties and presenting financial partners, real estate investors have several criteria to select from. Good cash on cash return is one of the critical indicators that can be used to demonstrate a property’s prospective return in a simple number. In principle, the higher the cash on cash return percentage, the healthier the real estate investment. Here are some additional significant lessons to consider when employing this key metric:
- The cash on cash return is a simple real estate finance metric that compares the proportion of money obtained in a particular month or year to the total cash spent.
- Real cash flow is presented as a dollar number, whereas cash on cash is expressed as a percentage.
- Debt service is included in one form of the cash on cash return calculation but not in the NOI or cap rate calculations.
An investor can use cash on cash return in conjunction with other financial indicators such as ROI, internal rate of return, net operating income, and cap rate to create a broad view of the possible returns from income-generating real estate.
We can help you in making an informed selection by conducting an in-depth market data analysis. Make use of our Mashvisor tools to assist you in locating the most suitable property for your investing objectives.
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