How To Calculate Your Cash On Cash Return

[Ronald Starusnak]

Improve Your Cash Flow By Analyzing Your Investments

           I love investing in Real Estate and if you're reading this; either you're hoping to love it, you do love it, or you're having problems with it. When you own rental properties, of course the goal is to achieve a good return on your investment and if you're not receiving a good return on your investment, then perhaps it is time to sell or analyze your investment. Calculating your return on investment or finding the "ROI" for a portfolio of rentals or a single rental properties is a decent indicator on how well the properties or properties are performing for you but you should also be considering your cash on cash return.

You May Ask, What Is A Cash on Cash Return?

CCR, which may also be referred to as the equity dividend return, is calculated a bit differently, according to Investopedia. "Calculations based on standard ROI take into account the total return on an investment. However, in regards to a Cash-on-cash return, you only measure the return on the actual cash invested, providing a more accurate analysis of the investment's performance.”

Here's the formula: Cash on Cash Return = Net Operating Income / Your Total Cash Investment.

NOI: This is the total amount of rent you collect, minus all of your expenses for the property.

How Do You Calculate The Cash on Cash Return?

Let's put it into simple form. Let's say you purchase a property for $100,000.00 all inclusive, then you spend $50,000.00 on repairs and improvements. Your total investment is now $150k. That part is easy to follow, right? Now we need to figure out our NOI for the property; to keep the math simple, let's say this is a 5 plex and we're charging $1,000.00 per unit for a total of $5,000/month. Our gross income on this property with those rental rates will be $60,000 and let's pretend that our expenses over the year were $5,000.00. Our NOI becomes $55,000.00

We put our formula into practice. NOI divided by our total cash investment = $55,000 / $150,000 = .36 (repeating) in other terms 36%. In our scenario, our cash on cash return is 36%. In a more complex scenario, you have other things to consider, utilities, mortgage, taxes, etc. Don't forget to consider appreciation of the property or depreciation of the property into your equation. That becomes a little more difficult and complex but you can find your appreciation rate online.

What Is A Good Cash on Cash Return Percentage?

It really depends on you, different markets will have a lower percentage of return and it may be more acceptable to have a lower number in some areas. This question is a little too area specific to expand on in this post.

How To Increase Cash on Cash Return?

The simple answer is to decrease expenses and increase the NOI. A good property manager will help you do both. Find a manager that has your expenses in mind when hiring contractors, that doesn't always mean hiring the cheapest contractor either (that's a whole different point I could make.) Small improvements may increase your rental rates, replacing windows may decrease your utility bills, etc.