You're looking for a quick and easy calculator for Cash on Cash Returns...
Great! That's what you've found.
You will find a simplified Cash on Cash Return Calculator - a tool to help you analyze your potential rental property or flip
- Calculate profit or loss of your rental property
- Calculate profit or loss on your flip
- Calculate projected value based on a capitalization rate
- Determine if it's eligible for financing by calculating Debt Service Coverage Ratio (DSCR)
- Determine Cash on Cash Return
If you want a deep understanding of the science behind it all - learn everything you ever wanted to know about analyzing rental properties.
INSTRUCTIONS FOR THE CASH ON CASH RETURN CALCULATOR
- Fill in cells highlighted in yellow.
- Learn how to estimate costs if you don't know them.
- Get an idea of your local vacancy rates.
- Don't forget about the hidden costs of real estate investing.
- White cells will auto-populate.
- If this isn't advanced enough, check out a more advanced rental property analyzer.
What Is Cash On Cash Return?
Simply stated, cash on cash return is the yearly return on the cash you invested. If you invested $20,000 in a rental property and it's returning you $4,000 this year, then your Cash on Cash return is 20%.
Do not confuse cash on cash return for return on investment (ROI) or return on equity (ROE). Cash on cash returns are far easier to calculate and explain a different story to the investor.
ROI is the combination of cash earned, appreciation, equity paydown, tax incentives, as compared to your total investment. Return on equity is like ROI, except it is calculated against your total equity vs your total investment.
Cash on cash return does NOT include any appreciation (or depreciation), equity pay down, or other factors that may affect your overall return on investment.
How to Calculate Your Return
The formula is very simple actually:
Why It's Important to Know the Cash-on-Cash Return on Rental Properties
Cash on cash return tells you how much cash you are going to put into your bank account this year compared to how much you invested in the deal.
It tells you nothing more and nothing less.
The fact is, ROI for rental properties is extremely difficult to calculate. ROI considers tax benefits, cash flows, as well as returns that you don't receive until after you sell or refinance such as equity or appreciation.
The great thing about cash-on-cash return is it's the actual cash in hand. If you can earn a great cash on cash return, then all the other things (like appreciation or equity pay down) are just icing on the cake.
What is a Good Cash on Cash Return?
Of course, it's impossible to tell you what a good cash on cash return is because this really depends on your goals and strategy.
A person near retirement may opt for less leverage and lower cash on cash returns because there is less risk. Obviously the higher the equity position, the less risk of being upside down on the loan
Another person may desire very high risk and truly maximize their cash returns at 50% or more by having maximum leverage.
Others may have a value strategy where they accept lower returns because they know there is massive upside and they will cash out in a couple years.
The point is, it's impossible to really tell you what a Good Cash on Cash Return is because it depends.
What I can tell you for a fact:
It's Important to Set Goals Before calculating cash on cash returns.
If you want 10% cash on cash returns, great... just know that before running the calculator. If you don't have a plan, you may decide "alright, that's good enough." after punching the numbers in and getting a result.
Never settle for less than what your goals are.
Don't forget to check out the rental income and expense worksheet!
Example of Calculating Cash on Cash Return
An investor buys a property for $200,000, puts $40,000 in work, and pays another $10,000 in carrying costs and closing costs.
The investor has put a total of $250,000 into the project.
If the investor turns around and sells it for $300,000 there is a total profit of $50,000.
$50,000 divided by $250,000 = 0.20
This is a total return of 20%
Pretty straightforward, right?
Example of a Cash Flow Negative Property That is Profitable
This goes back to the part about ROI vs Cash on Cash return.
Take the above example where you added a ton of value and have a good profit up front. Now, let's take a look at it's cash flow.
Let's say you finance the deal and get a 75% LTC loan on the full cost of $250,000. That's a loan total of $187,500. at a 5.25% rate with 25 year amortization, that's a monthly payment of $1,498. They have a total cash investment of $62,500 ($250k - $187.5k)
Now, let's say you are renting this property out for $2,500 per month and have total monthly expenses of $1,250. (I'm using super simple numbers to illustrate a point).
Your total cashflow is:
$2,500 - $1,250 - $1,498 = -$248
As you can see, every month it will drain your bank account by $248 dollars. This is a total cash on cash return of:
(-$248*12) / $62,500 = -4.76%
But, to calculate the ROI it's a bit more complicated, we need to know the total equity paydown and total appreciation.
Well, using a handy amortization table, I calculate the principal paydown was $4,971 in year one. Also, let's assume the property appreciates by a conservative 2% ($300,000 * ,02) which is $6,000
So, the ROI is cashflow + appreciation + equity paydown:
-$2,976 + $4,971 + $6,000 = $7,995
$7,995 / $62,500 = 12.89% ROI
These returns are great!... but the problem is you need to find cash from somewhere else to cover the yearly reduction in capital you will encounter.
Notes about the cash on cash Return calculator
1. As with any kind of return, cash on cash return can be tricky to figure. For example, earnest money is paid before closing, other costs at closing, and repairs after closing. Also, if a large project spans across fiscal years (say it starts in October and ends in February) you may pay a lot in year one but see all the returns and higher rent in year two. Cash on cash return is not an exact science - it is only one way to measure performance of your investments.
2. When calculating cash on cash returns, don't forget to include costs incurred during vacancy. When the property or unit is sitting vacant, it not only earns you nothing, but it actually costs you money. You still have to pay mortgages, taxes, insurance, utilities, etc... while the property is vacant. Do Not forget to consider these costs when calculating cash on cash returns.
Cash on Cash Return - Total return on the cash invested. This is not to be confused with ROI or ROE.
Gross Rents - Rent before any expenses.
Vacancy Rate - % of units that will be vacant. Look at your local city data to find reasonable vacancy rates for your area.
Repairs & Maintenance - This can vary depending on how old the building is and if it's been recently renovated. If you do major renovations you may be able to lower the rate. If it's an old property then you should increase it.
Management - Even if you will manage your own rental property, you should count the cost of your time.
Reserves - Savings for unknown or unforeseen expenses related to the rental property. Count it as an expense now, but if you sell it later and don't use the fund, then it's all extra profit.
Miscellaneous - Anything from pest control to trash service.
Capitalization Rate - The rate of return for investment properties in your area. If you are in a hot market it may be as low as 5 or 6% while other markets may see rates 10%, 12%, or even 14%.
Debt Service Coverage Ratio - NOI/Debt Service. Banks use this to determine your ability to pay back their note on your rental property. Every bank is different but aim for the ratio to be higher than 1.2 or 1.25.