![]() Your resulting return should be roughly 0.0514. From our example, your annual cash flow is $3,600, which you divide by your initial cash investment of $70,000. Take your annual cash flow and divide it by your initial cash investment. This means that your initial cash outlay totaled $70,000.ĭivide your annual cash flow by your initial cash investment: Once you have your annual cash flow and initial cash investment totals, you are now ready to calculate your cash on cash return. ![]() Also, you invested about $2,000 of your own funds to make some repairs. You took out a mortgage to finance the purchase but put down a 20 percent down payment of $60,000, plus $8,000 in closing costs out of pocket. Let us say you acquired a rental property for $300,000. This might include the down payment, closing costs, and any improvements or repairs made to the property before you had any tenants. Continuing with our example above, your annual cash flow is $3,600 ($300 per month x 12 months).Īdd up your initial cash investments: Next, add up any cash you paid out-of-pocket when initially acquiring the property. This leaves you with $300 in net cash flow each month.Ĭonvert to annual cash flow: Once you have your monthly cash flow, multiply the amount by 12 to arrive at your annual cash flow. For example, let us say that you earn $1,500 per month in rent, but you pay $1,200 in expenses, including your mortgage. ![]() Don’t forget to include other sources of income aside from rent, such as pet deposits or laundry fees. Once you have these numbers, go through the following steps to find out your return:Ĭalculate your monthly cash flow: Using the list you prepared earlier, subtract your expenses from your income. If you need some help with this step, here is a resource on accurately estimating your rental property expenses. If you are using this formula as a part of your deal analysis, you will need to project your numbers as best as you can. This allows you to calculate your monthly and annual cash flow, which are numbers you need to know before you can use the equation. Preparing an itemized list of your monthly rental income and expenses is the most efficient way to calculate your return. Here are some typical recurring expenses that will impact calculations: This is a calculation that indicates how much rental income you have left, after all expenses have been paid. The steps for calculating cash on cash return can be a bit involved, especially if you don’t already know your annual cash flow. The formula for calculating cash on cash return is as follows:Ĭash On Cash Return = (Annual Cash Flow / Initial Cash Outlay ) x 100% By relying on cash on cash returns as a comparison, investors can get a consistent look at the long-term potential of multiple assets. By looking at this metric across different properties, investors can better understand how each one will impact their overall portfolios. ![]() Many investors use cash on cash returns to compare different investment properties as well. The cash on cash returns formula might reveal which route allows you to maximize your annual returns. Cash on cash returns can also point investors to the right financing method - for example, if you are torn between a traditional mortgage or private lender. This formula can be a great way to determine how an investment will perform and ultimately help you determine whether to invest. Why Is It Important?Ĭash on cash returns are important when evaluating the potential profitability of a deal. In other words, cash on cash return tells you how much of your out-of-pocket investment you’re earning back each year. The calculation measures the net income produced by a property relative to the initial cash investment made to purchase that same property. Cash on cash return is one of several metrics used by real estate investors to evaluate an investment property’s current or future profitability. ![]()
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