Do you want to know how much of your out-of-pocket expenses you make back each year renting your investment property? What you’re looking for is the cash on cash return for a rental property. It’s a good measure of how your money’s working for you and gives you a good metric to use when comparing to other investments, such as the stock market.
What Is A Cash On Cash Return?
Your cash on cash return is the money you make back each year (the cash) from the cash you invested. This isn’t your return on investment which takes your carrying costs and debt into consideration. The CCR focuses on the cash you put back in your pocket that you paid out to buy the property.
Most investors find higher cash on cash returns for a rental property in older neighborhoods versus new and highly sought after neighborhoods. New neighborhoods often have higher costs, which require a higher cash deposit, which limits your cash on cash return.
How To Tell If A Cash On Cash Return Is Good
A good cash on cash return is subjective. What one investor thinks is a good investment, might not be as good to another. On average, the stock market provides an 8 percent return, since investing in real estate takes a lot more work than investing in the stock market, it makes sense that most real estate investors would want much higher cash on cash returns than 8 percent.
Many investors wonder if real estate investments compare or beat REIT (real estate investment trust) returns because investing in real estate yourself requires more capital and a lot more physical work. Actively managing a property takes a lot more work than investing in a REIT, so it’s natural to want much higher cash on cash returns than a REIT.
Figuring Out Your Cash On Cash Return
How do you determine your cash on cash return to compare it to a potential stock market return? It’s a simple calculation that requires just a few numbers.
Determine your monthly cash flow – This is the difference between the rent collected and your monthly expenses including mortgage payments, insurance, utilities, and maintenance. Take your monthly cash flow and annualize it to figure your cash on cash return.
Determine your cash investment – How much money did you invest upfront? This includes your down payment, closing cost payments, and any money you invested to rehab or repair the home.
With these two numbers, you can calculate your cash on cash return with the following calculation:
Annual cash flow/cash investment = Cash on cash return
For example, let’s say your annual cash flow is $5,000 and your initial cash investment is $50,000. This makes your cash on cash return 10 percent.
Like any investment, a good cash on cash return is subjective. While you may be happy with a 10 percent cash on cash return for a rental property, another investor may not be happy unless he has a 15 to 20 percent return. Weigh the pros and cons of your investment and predict your net cash flow as well as possible to make a good choice.