Return on investment (ROI) metrics are vital forms of data that every real estate investor needs to know. They measure the rate of return and the overall profitability of rental properties. One of the most commonly used forms of ROI is cash on cash return (or CoC return for short). In today’s blog post, we’ll discuss how to calculate cash on cash return quickly and accurately.
How to Calculate Cash on Cash Return
Here is the real estate cash on cash return formula:
Cash on Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested
As you can see, CoC return is an investment property’s rate of return based on its pre-tax cash flow and the total amount invested into the property. If you are an experienced real estate investor, you might have noticed something. Cash on cash return is very similar to cap rate, but with two main differences:
- Cash on cash return uses pre-tax cash flow, while the cap rate uses net operating income (NOI). The difference between the two is that pre-tax cash flow accounts for mortgage debt service.
- The cap rate formula uses property prices (or value) in its denominator. Cash on cash return, on the other hand, uses the total amount of cash invested into a property.
In other words, CoC return calculates ROI based on the financing method, while the cap rate does so regardless of investment property funding.
Calculating cash on cash return seems simple, as it only requires two variables. The truth is, however, that each variable breaks down to several others.
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Annual Pre-Tax Cash Flow
The first variable of the cash on cash return formula is the most complex. On the surface, annual pre-tax cash flow can be expressed like this:
Annual Pre-Tax Cash Flow = Net Operating Income – Debt Service
By breaking down the NOI, the formula becomes:
Annual Pre-Tax Cash Flow = (Gross Scheduled Rent + Other Income – Operating Expenses – Vacancies) – Debt Service
To better understand real estate cash on cash return, we’ll quickly break down these factors one by one.
Gross scheduled rent refers to the rental income you would receive if your rental property was occupied 100% of the time. ‘Other income’, on the other hand, is any other type of income that you would receive from the rental property. Examples include parking fees, vending machines, and dog-walking services.
Operating expenses are any costs that keep a rental property in service. This is where a significant sum of property expenses come from. These include real estate taxes, insurance, association fees, and renovations. The vacancy rate of a rental property is the number of days the property was vacant multiplied by the rental rate.
These four factors make up the net operating income of a rental investment property. To calculate pre-tax cash flow, debt service, or the amount used to cover interest and principal on a mortgage, is deducted from NOI.
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Total Cash Invested
Lastly, we arrive at the total cash invested. This variable is pretty straightforward. It is calculated by adding all the payments used to acquire or invest in a property.
Total Cash Invested = Down Payment + Closing Costs + Repairs
What Is a Cash on Cash Return Calculator?
As you have seen, calculating cash on cash return can be quite complicated. The many factors and data required make manual calculations using investment analysis spreadsheets prone to error. Also, it would take a very long time to estimate cash on cash return of a rental property, let alone multiple rental properties. So, is it even possible to accurately and quickly calculate cash on cash return? Fortunately, the answer is yes, with Mashvisor’s cash on cash return calculator!
Mashvisor’s Cash on Cash Return Calculator
Mashvisor’s calculator is all you need for a CoC return real estate investment analysis. The calculator computes CoC return for any property- whether it’s on the MLS or even off-market. It also does so in mere minutes, instead of months. The calculator is also interactive. It allows real estate investors to analyze investment properties based on listing price, preferred rental strategy, traditional and Airbnb rental income, and more. Above all, Mashvisor’s Airbnb CoC calculator is a must-have for investors who want to know how to calculate cash on cash return quickly and accurately.
How Does Mashvisor’s Cash on Cash Return Calculator Work?
So, how does Mashvisor’s CoC return calculator work? It functions according to three essential steps. These include estimating costs, computing rental income and occupancy rate, and calculating cash on cash return.
1. Estimate Costs
As seen earlier, the bulk of the annual pre-tax cash flow formula involves various expenses and costs. Therefore, the calculator’s first step is to estimate all expenses associated with buying and owning a rental property. Overall, expenses and costs fall into one of two types:
- One-time start-up costs: examples include down payment, home inspection, closing costs, repair costs, and needed furniture and appliances
- Recurring monthly expenses: examples include mortgage payments (which can be customized using Mashvisor’s mortgage calculator along with the down payment), property insurance, property tax, property management fees, rental income tax, HOA dues (for condos), utilities, property maintenance, and cleaning fees (for Airbnb short-term rentals)
2. Compute Rental Income and Occupancy Rate
Secondly, Mashvisor’s cash on cash return calculator will compute the rental income and occupancy rate of an investment property. The calculator computes these figures using analytical trends, predictive data, and nearby rental comps. These two factors are vital, as they influence the profit of any rental property.
Investors can also insert what their goal for rental income, and other profitability metrics, is into the calculator. Then, the calculator will adjust accordingly, displaying new results instantly. In addition, the calculator is able to perform this function for both traditional and Airbnb rental strategies.
3. Calculate Cash on Cash Return
Finally, using the obtained data, Mashvisor will calculate how much cash on cash return a rental property for sale will generate. In addition, both Airbnb and traditional CoC return will be presented, letting real estate investors understand which rental strategy is more profitable.
For more on how to calculate cash on cash return and how to find high cash on cash return real estate, CLICK HERE to start your FREE trial with Mashvisor!
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