Often, investors want to measure the return they’re getting on their investment after selling a property. If they carry the debt on a property, they use return on investment (ROI) or some other metric to determine whether or not it was worth it. However, investors who buy properties with cash and don’t carry any debt have to use a different metric. Cash on cash return is one way of finding out how much you’re making on your investment.
What is a Cash On Return?
Cash on cash return is a metric that helps real estate investors calculate the possible profitability of acquiring, owning, and managing properties. With this concept, you determine the amount of money you make or lose (depending on your real estate position) after making a mortgage and paying operating expenses. That’s all there is — it’s easy to understand and a base to measure against so you know precisely how each deal works for you.
Why is Cash On Cash Return Important?
Cash on cash returns is an important factor to consider when analyzing the profitability of a deal. This formula is often a great way to see how you can expect your investment to perform and, ultimately, help you determine whether or not an investment is worth pursuing. The cash on cash return formula can also point investors in the direction of their financing options. For example, if you are torn between a traditional mortgage and a private lender, this formula might reveal which option allows you to maximize your annual returns.
How To Calculate Cash On Cash Return?
To ensure that you are receiving the right return on your investment, you will need to calculate cash on cash return. One way to do this is to add up all the yearly cash flows and divide the overall number by a figure, including the initial investment. The resulting value is the cash on cash return.
Cash On Cash Return = (Annual Cash Flow / Initial Cash Outlay ) x 100%
This not only shows you how well your rental property is performing, but it also allows you to compare similar properties for purchase: do they have better cash on cash return?
Differentiating Cash On Cash Vs. ROI
Cash on cash returns (CCR) and return on investment (ROI) are terms often used interchangeably by real estate investors when calculating ROI. However, cash on the cash only looks at returns in regard to any cash out of pocket, while ROI looks at returns based on the total investment–including loans taken out for the purchase. Although you might hear investors use both terms interchangeably, they have separate applications.
Cash on Cash Return Vs. NOI
Cash on cash return is one of the most significant advantages of investing in commercial real estate. How this metric is calculated varies. The formula used here assumes that you are only worrying about income, not how much debt you pay. When looking at two deals where your numbers are similar, consider the NOI from the deal. The higher NOI means a greater return on your investment and a bigger bang for your buck.
