Cash on Cash Return 101: What you need to know for Real Estate
Hey there, budding real estate enthusiasts! Today, we’re diving into the exciting world of Cash on Cash Return. Cash on Cash Return is a vital concept in the realm of real estate investing. But don’t worry, we’ll break it down into simple language you can understand. Imagine you’re unlocking the secrets of growing your wealth through real estate.
Cash on Cash Return is your trusty guide, showing you the path to financial success. So, grab your notepads, because class is in session, and we’re about to make real estate investing a piece of cake!
What is Cash on Cash Return?
Cash on Cash Return is the rate of return used in real estate transactions. This rate calculates the cash income earned on the cash invested in a property. It’s like figuring out if your property is making you money or costing you money each year.
Cash on Cash Return Formula
Cash on Cash Return = (Annual Cash Flow (pre-tax)/Total Cash Investment)
Steps in Calculating Cash on Cash Return
- Calculate your Monthly Cash Flow.
- Convert from Monthly to ANNUAL Cash Flow.
- Add up your Total Cash Investment.
- Divide Annual Cash Flow by Total Cash Investment.
- Multiply the result by 100.
Example
- Start by figuring out your monthly cash flow. Add up all the money you get from things like rent, deposits, or extra fees. Then, subtract all your monthly expenses, which might include your mortgage payments. For instance, if you earn ฿67,580 in rent and pay ฿54,064 in expenses, you're left with ฿13,516 each month.
- To find your annual cash flow, multiply your monthly cash flow by 12. Using the example above, that would be ฿162,192.
- Now, tally up all the cash you put into the property, like the down payment, closing costs, and any repairs or improvements. If you bought a property for ฿8,447,500, made a 25% down payment of ฿2,115,625, had ฿236,930 in closing costs, and spent ฿118,465 on repairs, your total initial cash outlay would be ฿2,471,020.
- Calculate your cash on cash return by dividing your annual cash flow by your total cash investment. In this case, divide ฿162,192 by $73,000 (฿2,471,020). This results in around 0.0658.
- To make the result easier to understand, multiply the result by 100. In this case, multiply 0.0658 by 100. This should give you 6.58%.
Cash on Cash Return = (Annual Cash Flow (pre-tax)/Total Cash Investment)
Cash on Cash Return = (162,960/2,471,020) X 100
Cash on Cash Return = 0.0658 X 100 = 6.58%
Why Cash on Cash Calculation Matters
- Quick Mortgage Assessment: Cash on Cash return helps you determine if your condo can cover its mortgage costs. By comparing annual income with total cash investment, you can predict how much money you'll get back.
- Effective Investment: Cash on Cash return provides accurate investment return information.
- Long-term Planning: This formula isn't limited to the initial phase. When you're assessing your investment plan, this tool considers all costs, including maintenance. For better returns, make sure your investments match your goals and how much risk you're okay with.
What makes a good Cash on Cash Return?
A good cash on cash return varies based on the country. It may be influenced by interest rates, economic stability, regulatory conditions, and local real estate market dynamics.
Final Verdict
In conclusion, understanding Cash on Cash Return is your key to success in the world of real estate. By following the steps, you can make good decisions for a prosperous real estate journey. Happy investing, and may your real estate ventures be as rewarding as they are exciting!
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