Before buying an investment property, a real estate investor must cogently assess and evaluate the property. How does one evaluate a property? Well, there are plenty of metrics that you can use to evaluate the viability of an investment property. These include cash on cash (CoC) return, return on investment, cap rate, among many others. The most common metric and one that has greatly helped real estate investors succeed in real estate investing is the cash on cash return. When you are calculating the CoC return, however, it is important to use other metrics to back up your results. Consider calculating the Return on Investment (RoI), and Internal Rate of Return (IRR) as well.
What is cash on cash return? How to calculate cash on cash return? And what is a good cash on cash return?
Today, we will answer all of your questions. Let’s delve further.
First, What is Cash on Cash Return?
Cash on cash return is a rate of return that measures the cash income earned on the cash invested in a property. Contrary to the return on investment which measures the total return on investment, CoC return measures the return on the actual cash invested. If, for example, you want to buy a rental property and wish to pay a down payment of 10%, the cash on cash return would then measure the annual return made on that property with regards to the down payment only.
The cash on cash return formula is as follows:
Cash on cash return = net operating income (NOI)/ total cash invested
The net operating income is the annual income generated by a rental property or an income producing property after accounting for all income collected from operations and deducting all expenses incurred from operations. Note that NOI does not include taxes, principal and interest payments on loans, capital expenditures, and depreciation and amortization.
You can calculate CoC return by dividing the cash flow before tax over the equity invested. In order to measure the cash on cash return, you will need to know the following: net operating income, equity, and the value of the mortgage.
Mashvisor‘s rental property calculator can help you with these calculations. Not only will the rental property calculator calculate CoC return, but also cap rate and cash flow. Visit Mashvisor to learn more about its rental property calculator.
Let’s take a look at an example of how the CoC return will look like. Below we describe two cases:
Cash on Cash Return with No External Financing
Let’s say you want to purchase a rental property that costs $250,000 and you want to pay the entire amount in cash. You then pay closing fees, maintenance, insurance, and other rehab costs that may arise. Typically, these costs range between 3-5% of property price. In this example, these costs would be $12,500. So your total cash investment would be the property price plus the closing fees ($250,000 + $12,500= $262,500). Let’s also assume that you will be charging $2,100 in monthly rent. Your annual rental income would come out to be $25,200 ($2,100 * 12).
Estimating net operating expenses to be one-third of annual rental income is a fair game. So then,
NOI = 2/3 of annual rental income= $16,800.
The CoC return would then be:
CoC return = NOI/ total cash investment = $16,800/$262,500= 6.4%
This means that the CoC return that you should be expecting from renting your investment property would be 6.4%.
Related: Cash on Cash Return: How Should You Use It to Make the Best Real Estate Investment Decisions?
Cash on Cash Return with a Loan
Think about it! Not everybody is financially liquid to pay an investment in cash in full. Most real estate investors resort to a mortgage to finance their investments. Let’s consider the same property as described in the example above. Now you are paying 25% or $62,500 in cash as a down payment. The total cash investment would then be that plus closing fees of 5% of property price.
Total cash investment= $62,500 + $12,500= $75,000.
To calculate the NOI, we would also have to calculate the debt service. Debt service is the cash required to cover the repayment of interest and principal on a debt for a particular period. Assuming an 8% interest rate, the debt service will equal $15,000 or 8% * $187,500.
Therefore, the NOI = $16,800 – $15,000 = $1,800
Based on which, the CoC return = $1,800/$75,000 = %2.4
What is a Good Cash on Cash Return?
Real estate experts continue to have conflicting opinions on what is a good cash on cash return. Some experts have concluded that anything above 8% makes an investment property profitable. For other real estate investors, CoC return must be 20%. However, such returns depend on the location and the type of investment property you are buying. If you want to succeed in real estate investing, you should not only use CoC return for your evaluation. This is because the cash on cash return does not factor in tax benefits or even depreciation.
Related: What is Cash on Cash Return? The Simple Guide
Best Real Estate Investments and Cash on Cash Return
Mashvisor has compiled data and conducted real estate analysis to provide you with the best real estate investments in terms of CoC return. Below are the top performing cities for rental properties.
Las Vegas, NV
Median price: $364,666
Average price per sq. ft.: $1,978
Traditional rentals cash on cash return: 2.67%
Airbnb rentals cash on cash return: 4.59%
Traditional rentals rental income: $1,411
Airbnb rentals rental income: $1,609
Number of listed properties:
4,264 investment properties
483 Airbnb rental properties
3,117 traditional rental properties
Lancaster, PA
Median price: $265,291
Average price per sq. ft.: $2,135
Traditional cash on cash return: 1.77%
Airbnb rentals cash on cash return: 5.61%
Traditional rentals rental income: $1,066
Airbnb rentals rental income: $1,774
Airbnb Occupancy Rate: 35%
Number of listed properties:
121 investment properties
46 Airbnb rental properties
452 traditional rental properties
Related: What is a Good Cash on Cash Return?
Nashville, TN
Median price: $503,685
Average price per sq. ft.: $2,149
Traditional cash on cash return: 2.32%
Airbnb rentals cash on cash return: 5.88%
Traditional rentals rental income: $1,784
Airbnb rentals rental income: $2,959
Airbnb Occupancy Rate: 49%
Number of listed properties:
546 investment properties
1,444 Airbnb rental properties
2,862 traditional rental properties
Colorado Springs, CO
Median price: $367,393
Average price per sq. ft.: $2,534
Traditional cash on cash return: 2.91%
Airbnb rentals cash on cash return: 6.44%
Traditional rentals rental income: $1,436
Airbnb rentals rental income: $2,257
Airbnb Occupancy Rate: 48%
Number of listed properties:
702 investment properties
251 Airbnb rental properties
691 traditional rental properties
Charleston, SC
Median price: $610,969
Average price per sq. ft.: $2,030
Traditional cash on cash return: 3.84%
Airbnb rentals cash on cash return: 10.09%
Traditional rentals rental income: $1,994
Airbnb rentals rental income: $4,116
Airbnb Occupancy Rate: 56%
Number of listed properties:
232 investment properties
449 Airbnb rental properties
362 traditional rental properties
Click here to start searching and find the best investment properties with high cash on cash returns right away!
Wrapping Up
Cash on cash return is a common metric that many real estate investors use to assess the viability of an investment property. The CoC return assesses the performance of total cash invested in an investment property. While the cash on cash return only assesses the cash invested in an investment, using other real estate investing metrics to supplement your analysis becomes mandatory. Having exhausted and used these metrics, we ensure that you will be making sound decisions.