Real estate investors experience more success when they know what they want to achieve with their investment. It’s easier to get a return on your investment when you know what kind of return you want to achieve. For that, you can use the cash on cash return calculator.
Cash on cash return is a metric that shows you the exact amount of gains you pull out of a real estate investment. It also helps you craft an investment strategy for short-term and long-term investments.
Keep on reading to find out what is cash on cash return and how to use it to your advantage!
Cash on cash return is a rate that calculates the yearly return on your real estate investment. You get the exact rate when you calculate the total income from the real estate and deduct mortgage payments and other expenses.
The cash on cash return is an investor-friendly way to estimate yearly profit. Also, it helps you to calculate the overall ROI on the real estate investment.
Now, that’s all technical jargon. COCR (Cash on Cash Return) allows you to determine how much money you can get per year on your investment. For a real estate investor, that gives you a complete overview of how your real estate performs over time.
Finally, it gives you a map of how much you can earn and how to earn money from your investment. COCR carves out the costs and profits during the initial calculation.
To calculate COCR, deduct annual pre-tax cash flow by total cash invested.
Annual pre-tax cash flow consists of GSR (gross scheduled rent) and OI (other income). Total cash invested consists of vacancy, operating expenses, and annual mortgage payments.
There’s another way to calculate cash on cash return when there is no mortgage loan. Then, you won’t have to account for mortgage payments and only deduct vacancies and operating expenses.
However, that’s only a part of the calculator. The other amount of cash on cash returns rests on the market. For example, it’s much easier to get a high COCR if you rent out the apartment in a desirable market.
Even if you finance real estate in a market with high tourist potential, you can turn a higher profit. So, always account for market conditions before deciding on any real estate investment.
Imagine that you want to buy a single-family home and rent it out. The price of a single-family home is $150,000. To buy the home, you finance the purchase with a loan and put a down payment of 25% or $37,500. And the mortgage payment per month is around $550.
Now, you get a value of gross monthly rent for $2,000 with a vacancy factor of about $100. That leaves you with a total rental income of $1,900. Account for other expenses such as property management, insurance, maintenance, renovation and taxes. These account for total operating expenses of about $570 per month.
When you apply the COCR calculation formula, you get around $780 per month of income, around $9,360 yearly. Now, you divide the home’s total price by yearly income to get the COCR rate. The COCR rate is 16% above average since the acceptable COCR rate is 8-12%
Here are some valuable things to know before calculating cash on cash return. The cash on cash return rate is higher in the second and third years than in the first year of owning a property.
Also, the cash on cash return rate is lower in the first two years if you buy real estate in cash. Of course, later on, the rate is higher since you paid off the total price of real estate.
Another way to increase a COCR rate is to sell real estate after a year with the rest of the mortgage. For example, you could buy a property that’s worth $1,000,000 on a mortgage loan. Then, you could put a $100,000 down payment for that mortgage. Then, after a year, you could upsell the home with an existing mortgage and double up on your down payment.
That leaves you with $200,000 on your original investment, and most new investors lack that kind of finesse in their investing. So, if you want positive cash on cash return to be positive, start small.
Often, a single-family home can give you a taste of real estate investment. And it can teach you everything you need to know about profiting from real estate investments.
All that is left is to get into real estate investing. With cash on cash return calculation, you find the best investment opportunity for investing.
After all, you can always start with a single-family home. It’s easy to pay off even with a mortgage, and you can prepare for new investments. Give it a try.