Cash on Cash Return

The Cash on Cash Return is a percentage that measures the return on cash invested in a real estate investment property. It is calculated by dividing before-tax cash flow by the amount of cash invested in a real estate investment property (down payment amount and closing costs) and is expressed as a percentage.

A way to view this ratio is to compare it to a return of a certificate of deposit. You deposit money in the bank and the bank pays you an annual return, say 5%. The 5% is the Cash on Cash ratio.

It works as follows:

• Calculate the annual income from the real estate investment property (rent and other income)
• Total the annual real estate investment property expenses that you pay as the owner/landlord such as:
     o Debt Expenses (Mortgage Payments)
     o Insurance
     o Property Management Company
     o Water/Sewer/Garbage
     o Snow/Lawn Care
     o Real Estate Property Taxes
  
• Subtract the annual expenses from your annual income, which will give your Annual Net Operating Income.
• Calculate your mortgage payment, then multiply by 12 to get your annual mortgage payment.
• Subtract your annual mortgage payment and your annual tax amount from the above Annual Net Operating Income to arrive at your Net Annual Cash Flow.

The following values have an impact on the Cash on Cash Return calculation:

    -INITIAL CASH INVESTMENT (such as DOWN PAYMENT AND CLOSING COSTS)
    -MONTHLY RENT
    -VACANCY RATE
    -MORTGAGE PAYMENTS
    -ANNUAL EXPENSES

How to calculate the Cash on Cash Return?

Net Annual Cash Flow Cash on Cash Return = -------------------------------------- Initial Cash Investment Example: An investor purchases a real estate investment property and puts $20,000 in down payment and closing costs, the monthly mortgage payments are $1,000, the monthly rent is $1,000, and total expenses $4,000. The vacancy rate in the area is 3%. Initial Investment  : $20,000 Monthly Rent  : $1,500 Vacancy Rate  : 3% Monthly Mortgage Payment :  $1,000 Total Annual Expenses :  $4,000 STEP 1: Calculate Annual Mortgage Payments Annual Mortgage Payments = Mortgage Payment * 12 Annual Mortgage Payments = $2,000 * 12 Annual Mortgage Payments = $12,000 STEP 2:Calculate Gross Annual Income Gross Annual Income = Monthly Rent * 12 Gross Annual Income = $1,500 * 12 Gross Annual Income = $18,000 STEP 3:Calculate Vacancy and Credit Loss Vacancy and Credit Loss = (Gross Annual Income * Vacancy Rate)/100 Vacancy and Credit Loss = ($18,000 * 3%)/100 Vacancy and Credit Loss = $540 STEP 4:Calculate Gross Operating Income Gross Operating Income = Gross Annual Income - Vacancy_Credit Loss Gross Operating Income = $18,000 - $540 Gross Operating Income = $17,460 STEP 5:Calculate Net Operating Income Net Operating Income = Gross Operating Income - Total Annual Expenses Net Operating Income = $17,460 - $4,000 Net Operating Income = $13,460 STEP 6:Calculate Net Net Annual Cash Flow Net Annual Cash Flow = Net Operating Income - Annual Mortgage Payments Net Annual Cash Flow = $13,460 - $12,000 Net Annual Cash Flow = $1,460 STEP 7: Apply Formula Net Annual Cash Flow Cash on Cash Return = -------------------------------------- Initial Cash Investment $1,460 Cash on Cash Return = -------------------------------------- $20,000   Cash on Cash Return = 7.3%

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