Real estate investing can be a lucrative form of investment if done right. However, it is not only about buying and selling properties for a profit. Savvy investors understand that analyzing investment properties based on their potential cash flow is the key to success. One such metric is the cash-on-cash return. This article will discuss what cash-on-cash return is, how to calculate it, why it is important, and provide examples of its application in real estate investing.
What is Cash-on-Cash Return in Real Estate Investing?
Cash-on-cash return is a metric used in real estate investing to evaluate the return on investment (ROI) of a property. It measures the cash income earned on the total cash invested in the property. In simpler terms, it tells an investor how much money they are making on their investment compared to how much they put in.
How to Calculate Cash-on-Cash Return in Real Estate Investing
Calculating cash-on-cash return involves dividing the annual cash flow from the property by the total amount of cash invested. The annual cash flow includes rental income, tax benefits, and any other income generated from the property. The total amount of cash invested includes the down payment, closing costs, and any repair or renovation costs. The resulting percentage is the cash-on-cash return.
Why Cash-on-Cash Return is Important for Real Estate Investors
Cash-on-cash return is important for real estate investors because it helps them evaluate the profitability of an investment property. A high cash-on-cash return means the investor is making a good return on their investment. On the other hand, a low cash-on-cash return could indicate that the investment is not generating enough income to justify the investment.
Cash-on-cash return is also useful for comparing different investment options. An investor can use the metric to determine which investment offers the best return on investment. This allows them to make informed investment decisions and avoid losing money on a bad investment.
Examples of Cash-on-Cash Return in Real Estate Investing
Let’s say an investor purchases a rental property for $200,000 with a down payment of $40,000 and closing costs of $5,000. The investor spends an additional $10,000 on repairs and renovations. The annual rental income from the property is $20,000, and the investor receives a tax benefit of $5,000. The total annual cash flow is $25,000. The cash-on-cash return for this investment would be 25%, calculated by dividing the annual cash flow by the total cash invested ($25,000 ÷ $55,000 = 0.45 or 45%).
Another example would be if an investor purchases a commercial property for $500,000 with a down payment of $100,000 and closing costs of $10,000. The annual rental income from the property is $50,000, and the investor receives a tax benefit of $15,000. The total annual cash flow is $65,000. The cash-on-cash return for this investment would be 65%, calculated by dividing the annual cash flow by the total cash invested ($65,000 ÷ $110,000 = 0.59 or 59%).
In both examples, a high cash-on-cash return indicates that the investment is generating a good return on investment.
In conclusion, cash-on-cash return is an important metric for real estate investors to understand. It helps investors evaluate the profitability of an investment property and compare different investment options. When calculating cash-on-cash return, it is important to include all costs and income associated with the property. With careful analysis and the use of resources like repit.org for valuable data insights, investors can make informed decisions and maximize their returns in the real estate market.