Buying an investment property in 2021?
Real estate investors need to learn how to calculate cash on cash return in real estate before making a purchase. If you’ve never done it before, this article will walk you through a few simple steps and show you how Mashvisor can help.
What Is Cash on Cash Return?
Cash on cash return shows your ROI based on the amount of cash invested into a property (not the total price paid for the property) and takes into consideration the financing that goes into an investment.
While the cap rate is also an important metric to calculate when considering purchasing a rental property, the cash on cash return will give you the best idea of how much money you are getting back out for the money you put in. The cap rate focuses on the total value of a property, which is important for determining long-term gains and profitability.
Related: Cap Rate vs. Cash on Cash Return: How to Calculate Rate of Return in Real Estate Investing
Ultimately, your tenants will be paying your real estate investment loans, (assuming you have a mortgage). This means that when everything is said and done, you only ever truly invested your initial down payment and other startup costs into the property.
For example, if a property costs $200,000, and you make a 20% down payment plus investing another $5,000 into furnishing and renovating the rental property, you only invested $45,000 of your cash. Cash on cash return is such an important metric to understand because it will give you the best idea of what your cash is accomplishing for you.
How to Calculate Cash on Cash Return in 2021
Cash on cash return can be calculated through two methods. The first is by using a return on investment formula. The second and most common method in 2021 is by using a real estate investment calculator.
As we discussed, real estate return on investment is key. While you can certainly learn to how to calculate cash on cash return long hand, it’s recommended that you use real estate investment software for two reasons:
- Real estate investment calculators are more accurate because they use bit data and AI to make estimates.
- Using a calculator will help you stay ahead of competitors and make faster, smarter, and more confident investment moves. That’s because you can make calculations instantly.
Wondering what is a good return on investment? Check out this article: What Is a Good Return on Investment for Real Estate?
or watch this video:
Before we dive into how Mashvisor’s calculator can help you make investment decisions, let’s talk about how to calculate cash on cash return by hand.
Cash on Cash Return Formula
In order to calculate cash on cash return, you need to follow this formula:
Cash on Cash Return = Annual Pre-Tax Cash Flow/Total Cash Invested
While it seems fairly simple, it requires us to understand and make another calculation first: cash flow.
Calculating Cash Flow
Cash flowing real estate is a rental property which yields recurring positive revenue. In order to calculate your cash flow, you must add up your income and subtract your expenses. The difference is the estimated cash flow, or the net profit you will receive.
Adding Income
- Rent
- Additional income
Additional income could be considered any other source of income your rental property produces besides rent. For example, this could include storage unit fees, parking permits, and revenue from other services provided. Add the value of these income streams to the rent you intend to collect. You will need to do some research into local rental rates to determine what a fair price for an individual property would be. Looking at rental comps can help with this process.
Subtracting Expenses
- Mortgage and interest payments
- Rent lost due to vacancies
- Maintenance and repairs
- Utilities (if tenants are not paying)
- Property taxes
Add up all the expenses that will apply to your rental property. While some figures will be very evident, others will need to be estimated, such as maintenance and repairs. You can factor in a few hundred dollars per month for this to be on the safe side. For metrics like rent lost to vacancies, your best option is to research the average occupancy rate for rentals in your local market.
Determining Total Cash Invested
The second part of the formula includes figuring out the total amount of cash you will invest into a property. While this seems fairly obvious, real estate investors making this estimate can forget about the expenses outside of the down payment. Every bit of cash that you put into a property should be reflected in this formula:
- Down payment
- Closing costs
- Renovations and repair costs
- Items purchased to furnish the house
Using a Cash on Cash Return Calculator in 2021
You can probably tell that calculating cash on cash return long hand isn’t the best way to find this critical metric. There is a high chance of human error in making estimates that can throw off your computations.
On the other hand, Mashvisor’s cash on cash return calculator uses predictive analytics and rental comps to instantly and accurately estimate:
- Cost (one time costs and recurring costs)
- Occupancy rate
- Rental income
- Traditional and Airbnb cash on cash return
The cash on cash return calculator essentially goes through the same steps an investor would take when making manual computations. The key difference is that it draws from vast data sources and analytical trends to retrieve these estimates. Then, the calculator plugs these metrics into the formula to deliver your automatic cash on cash return.
Our Airbnb calculator does this for both traditional rentals and Airbnb investment properties, which makes comparing different real estate investment strategies a breeze. You will also find neighborhood level cash on cash returns to quickly help you determine where you want to invest. It’s important to look at both the neighborhood and the individual property level data before coming to a final investment decision.
See also: 2021 Cash on Cash Return By City: What to Expect as a Real Estate Investor
Another useful feature of Mashvisor’s rental property calculator is its interactive nature. Real estate investors can change metrics within the calculator to view different results based on their goals, making it fully customizable.
Moreover, it’s important to mention that Mashvisor does not work as a cash on cash return calculator only but as a comprehensive investment property calculator. In addition to the above-listed metrics, it will also provide estimates of:
- Cash flow
- Traditional and Airbnb cap rate
If you need some extra help in figuring out how to calculate CoC return, make sure to check out our video below:
The Takeaway
As one of the most important metrics to understand as a real estate investor, knowing how to calculate cash on cash return on a rental property will boost your real estate game.
However, while learning the principles behind how to calculate cash on cash return is beneficial to your real estate knowledge, taking the time to make this calculation manually is not the smartest move you could make because it takes too long. The most successful real estate investors realize that time is money, and they know that the best properties exit the market fast. That’s why having the top real estate investment tools such as this calculator can help you get the best deals.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today and enjoy 15% off for life.