How to calculate returns. Pt. 1 “Cash on Cash”

Cash on Cash Return

Hey Everyone.  When evaluating real estate investments, one of your main questions should be “How do I  calculate my return on investment?” The most common metric is your Cash on Cash Return.  But what is that exactly? And how do you calculate it?

Cash on Cash is simply how much cash you receive each year compared to how much cash you invested in the first place.

The calculation is: Annual Dollar Income ÷ Total Dollar Investment.

If you invest $100,000 and receive $10,000 net proceeds each year, that’s a 10% Cash on Cash return.  10,000 ÷ 100,000 = 10%.  Pretty simple right?

This is my favorite metric because it’s easy to calculate, easy to understand, and is based on simple numbers.  There are no fancy metrics here, no jargon or lingo I need to understand.  “How much money does this property put in my pocket each year compared to how much it cost me to buy it?”

Two caveats here:
1. This return can change every year.  One year you may have more maintenance requests on your property, driving expenses up and your cash on cash return down.  Another year you may have lower vacancy than expected, driving expenses down and your cash on cash return up.  It is best practice to keep track of this both yearly and cumulatively for the life of your investment.

2. Make sure you’re calculating your ‘Annual Dollar Income’ correctly.  This should be your NET proceeds.  Just because you receive $2,000 in rent from a property doesn’t mean you can use the full $2,000 in your calculations.  You must subtract all your debt service and operating costs (mortgage, taxes, insurance, vacancy reserves, maintenance reserves, property management fees, etc.)  What’s left over is your NET proceeds, and that is the number you will use to calculate your Cash on Cash Return.

What kind of cash on cash return would make you feel comfortable with a real estate investment?  Maybe compare it to your stock portfolio.  What kind of cash on cash return would make you consider selling off $50k in stocks in order to invest in real estate?

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