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If you’ve spent more than 4.7 seconds reading about real estate investing, you’ve heard the term “cash on cash return” tossed around like a chicken nugget.
Do people toss around chicken nuggets? I don’t know why I thought of that.
Anyhow… It’s really important to understand the term because it’s what drives real estate investing.
What Is Cash On Cash Return?
Cash on cash return is a fundamental concept for real estate investors. It is simply the total cash you get from a deal every year as a percentage of the total cash you invested. This is similar but fundamentally different than your Return on Equity or the Capitalization Rate.
How to Calculate Cash on Cash Return
If you invested $20,000 in a rental property and it paid you $4,000 cash this year, then your Cash-on-Cash return is 20%. It does not include any equity pay down or appreciation.
It is entirely focused on your cash return based on the cash invested. Do not confuse cash on cash return for return on investment (ROI) or return on equity (ROE). Cash on cash returns are far easier to calculate, but they explain a different story to the investor than other return calculations.
Cash on cash return does not include any appreciation, depreciation, equity pay down, or other things that have real effects on your net worth.
calculate cash on cash return
Cash on cash return formula
Here is a handy-dandy return calculator you can play with.
The investor has put a total of $130,000 into the project.
If the investor turns around and sells it for $150,000 there is a total profit of $20,000.
This is a total return of 15.4%
retty straightforward, right?
Cash on Cash Return Example #2, a little more complicated
Let’s say the investor above does the exact same deal, but this time borrows $100,000 from a lender and pays an additional $5,000 in interest. The total cost of the project is now $135,000 and there is a profit of only $15,000.
But, the investor has only put $35,000 cash into the project.
$15,000 / $35,000 = 42.9% cash on cash return.
Even though there is less profit, the rate of return is much higher.
Cash on Cash Return Example – Rental Property
Let’s use the exact same property as the first example. The investor purchases the property and spends $130,000. Then, he or she get’s a conventional loan for 75% of the value, meaning the loan is for $97,500 and the amount of cash the investor spends is $32,500.
The investor rents the house out to a tenant. For simplicity let’s just say PITI is 900, the expenses are $600, and the rent is $2,000. The total expenses are $1,500 and rent is $500 for a total cash flow of $500 per month or $6,000 per year.
$6,000 / $32,500 = 18.5% cash on cash return.
Cash on Cash return vs Return on Investment
This example will illustrate the difference between cash on cash return and ROI.
In the example above, you’ll notice cash flow is rent minus PITI and expenses.
But part of that PITI actually goes toward principal pay down and will be recovered when the property sells.
Cash on cash return doesn’t care about that. It just wants to know how much cash we put in the pocket compared to how much we invested.
This video was inspired by:
What Is Cash On Cash Return – The #1 Most Important Figure
Kris Krohn – Limitless TV
Explained: Cash on Cash Return for Real Estate
Straight Talk Schools
Calculating Numbers on a Rental Property [Using The Four Square Method!]
how to Use Leverage: Real Estate Investing Made Simple with Grant Cardone
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