Cash-On-Cash Return: How To Calculate The Metric For Any Rental Property

Dated: July 16 2020

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Cash-On-Cash return analysis is crucial data for evaluating the rental property and finding out its return on investment (ROI). This data is most important to real estate investors who wish to fund or own a rental property. However, before we proceed into calculating cash-on-cash return, it is pertinent that we explain the term and the implication of the metric on real estate investment.

What is Cash-On-Cash Return?

In real estate investment, Cash-on-cash return is applied to find the value of a property, as well as its return based on the amount spent on purchasing the property by the investor and the amount of rental income which the property will generate. In short, the metric determines the percentage of the total amount of cash spent from an investor’s money, which will be made in the rental income per year. Ideally, the metric is given as a percentage value. For instance, assuming you possess an investment property having a 10% cash-on-cash return. This implies that the investment property is accruing a rental income which is equivalent to 10% of the overall amount of cash spent on the investment every year. Be informed that compared to cap rate (a similar metric), cash-on-cash return considers the means of financing applied to buy the rental property.

As for investment property purchased with an 80% mortgage, only 20% which you have paid in cash for the property will apply while calculating the cash-on-cash return. Now, let’s look at the mathematical aspect of cash-on-cash return for any rental property. Once you have calculated every expense, the next thing is to understand how to determine the cash-on-cash return for the rental property.

The simple formula for calculating cash-on-cash return is: Cash on Cash Return = (Cash Flow/Cash Invested) x 100

Let’s consider an example so that you can understand how to calculate the cash-on-cash return better. Assuming you bought investment property at the cost of $200,000 with a 60% mortgage. This implies that you are paying $80,000 in cash for the property. Now, you have leased out the property at the rate of $1000 per month, which totals $12,000 rental income per year. Also, let’s assume that the annual recurring expenses of the property go thus:

Property management: 10% of your rental income ($1,200)
Mortgage: $4,500
HOA fees: $200
Maintenance costs: $500
Annual taxes: $300
Vacancy rate: 20% ($2,400)

Overall expenses per year = $9,100

Cash Flow is calculated by subtracting annual expenses from the annual rental income.

Thus: Cash flow = (Annual rental income) $12,000 – (annual expenses) $9,100

Cash Flow = $2,900

The next step is to calculate the cash-on-cash return with the formula stated earlier:

Cash on Cash Return = (Cash Flow/Cash Invested) x 100
Cash on Cash Return = ($2,900/$80,000) x 100
Cash on Cash Return = 3.62%

This outcome implies that after calculating every expense, the rental income generated from the property totals 3.62% of the overall amount of cash spent on the investment property. Simply put, the investor will be earning a profit worth 3.62% of the total amount of cash invested in the property every year.

Conclusion

To determine the cash-on-cash return for your rental property accurately, it is pertinent that you find the costs and expenses related to running, maintenance, and owning the property. Finally, endeavor to find the amount of rent which you intend to place on the rental property. That’s all!

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