Rental Property Cash On Cash Return Calculator
What is cash-on-cash return and why is it important to know on rental properties?
It's very difficult to know the true return on investment (ROI) on rental properties. To get the true ROI, you have to consider things like tax benefits, cash flow, and returns that aren't realized until a sale or refinance of the property, like equity paydown or appreciation of the property. A much easier metric to figure is the cash-on-cash return on investment. This calculation looks at your initial investment and compares it against your yearly cash flow. Since it doesn't take into account, the appreciation of the property, equity paydown, or other tax benefits, you can simply look at those as a bonus. This calculation will give you a good starting point when determining if the property in question is a good investment or not.
The following video gives a pretty good explanation of how this all works. (I'm not affiliated in any way with the video creator or his business.)
Calculate Your Cash on Cash Return
On this first step, under "Monthly Rent" you will put the amount of rent you will collect each month from the property, including all units if this is a multi-unit property.
Under "Other Monthly Income" you'll include the estimated monthly income from anything else on this property like parking, laundry machines, etc.
Other Monthly Income:
Here, you'll need to figure out your monthly expenses. Some of these will be fairly easy to estimate while some will prove a little trickier.
Are the tenants going to be responsible for their own utilities? If so, you can leave this blank.
Don't forget to put a little aside for repairs/maintenance. If you're going to hire someone to maintain the property, be sure to include their fees as well.
If there are expenses that don't have a category, include them under the "Other" field.
Here you will include everything in your initial investment. Don't forget to figure in closing costs and a rehab budget. Any money you'll be spending initially that doesn't have a category, simply add it to the "Misc./Other" field.
Misc. / Other:
You see two important numbers here. Your Monthly Cash Flow and your Cash on Cash Return.
We got your monthly cash flow by subtracting your monthly expenses from your monthly income.
The Cash on Cash Return was calculated by taking your anual cash flow and dividing it by your initial investment then converting it to a percentage.
Total Monthly Income:
Total Monthly Expenses:
Total Initial Investment:
Monthly Cash Flow:
Cash On Cash Return =
More on the Cash on Cash Return Metric
Cash-on-cash return is a simple and very useful financial calculation that most real estate investors are familiar with because they use it regularly. Cash-on-cash return measures the amount of yearly cash flow a property will generate as a percentage of the total cash invested.
Detailed Breakdown of the Calculation
Figuring the cash-on-cash return on a property is fairly easy. You deduct your yearly expenses from your yearly income. This will give you your yearly cash flow. You then divide your yearly cash flow by your initial investment. This will give you a percentage and this is your cash-on-cash return.
Is cash flow not the same is cash on cash return?
There are two main differences in cash flow and cash on cash return.
First, cash on cash return is expressed as a percentage and cash flow is expressed as a number.
Cash on cash tells you what percentage of return you are getting on your initial investement while cash flow tells you how much money you'll be depositing into your account at the end of the day, after your expenses are deducted. (Minus any taxes of course)
Let's look at this another way. Let's say you get purchase a CD for $10,000 that earns 1.7%. You'd earn $170. The $170 would be your "cash flow" and your cash on cash return would be the 1.7%.
So, what is a good cash on cash return?
That answer will be different for everyone. It depends on what kind of returns you can currently get. Compared to a CD (which is SUPER low as of this writing at less than 1%), then anything over that would be considered "good".
Of course there are other types of investments as well and most of them will be greater than the return on a CD. Some real estate investors will be happy with a 10% return while others won't touch a property for under 15% cash on cash.
Key Takeaways About Cash-on-Cash Returns
Real estate investors have a lot of metrics to choose from when analyzing properties. CoC return is one of many key metrics that will help showcase a property's potential return. The higher the number, generally speaking, the better the investment.
Cash-on-cash return is a quick financial calculation for real estate that is used to measure the percentage of cash received in a given year and compared to the total cash invested.