Cash on Cash Return Calculator for Real Estate Investors

Calculate the Cash on Cash Return of your property using our calculator.

Cash on Cash Return Calculator

Cash-on-Cash Return

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Cash on cash return is a fundamental concept in real estate investing. It measures whether an investment property is profitable in relation to the amount of cash invested. Thus, it is a key metric that allows investors to assess the potential return on their investment.

By calculating the cash on cash return, investors can determine how much their initial investment earns. Meanwhile, a cash on cash return calculator simplifies the computation by automating the process. This allows investors to evaluate different investment opportunities quickly.

How to Use Fairmount Funding's Cash On Cash Return Calculator

By utilizing a cash on cash return calculator, investors can save time and gain valuable insights into the financial viability of various real estate investment opportunities. Additionally, our tools make it simple for users to evaluate an investment property’s potential profitability.

Here are the steps to effectively use Fairmount Funding’s cash on cash return calculator:

Gather relevant financial information. Before using the calculator, gather essential financial data related to the investment property. This includes the annual rental income, mortgage payments, and total cash invested in a property.
Input the financial figures. Enter the gathered financial information into the calculator’s designated fields. Ensure accuracy and double-check all values to obtain precise results.
Analyze and compare results. The calculator will automatically show your property investment’s cash on cash return. Thus, you can compare different investment opportunities and assess their relative profitability. Higher cash on cash returns indicate potentially more lucrative investments.

How To Calculate Cash On Cash Return

To calculate the cash on cash return, you can take the annual pre-tax cash flow generated by the property. Next is to divide it by the total cash investment. The formula to compute cash on cash return is:

Cash on Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Investment) x 100

Relatively, you can use the following formula to determine the annual pre-tax cash flow:

Annual Pre-Tax Cash Flow = Annual Rental Income – Annual Mortgage Payments

Let’s break down the different components of the formula:

Annual Pre-Tax Cash Flow. This refers to the net cash flow generated by the investment property over a year. It takes into account the rental income received minus the operating expenses.
Total Cash Investment. This includes the total amount of cash invested in the property. It typically includes the down payment made when purchasing the property, closing costs, and any upfront renovation or repair expenses. In contrast, it excludes the amount financed through a mortgage or other loans.

By dividing the yearly pre-tax cash flow by the total cash investment and multiplying it by 100, the resulting figure represents the cash on cash return percentage. This indicates the annual return on the cash invested in the property.

Suppose the annual pre-tax cash flow is $10,000, and the total cash investment is $100,000. As such, the cash on cash return would be calculated as (10,000 / 100,000) x 100 = 10%. This means that the investor is earning a 10% return on their cash investment in the property.

Why do investors use cash on cash return calculation?

Investors use the cash on cash return calculation as a valuable metric for several reasons:

It allows investors to evaluate the potential profitability of an investment property. By calculating this metric, investors can determine the percentage return they earn on the cash they have invested in a property.
It enables investors to compare multiple investment properties. By calculating and comparing the cash on cash return percentages, investors can identify which properties are generating higher returns on their invested cash. This information helps them prioritize and make more informed investment decisions.
It provides insights into the risk and return profile of an investment property. A higher cash on cash return indicates a higher return on investment, which may appeal to investors seeking higher profits. Conversely, a lower cash on cash return may indicate a lower return and may be associated with higher risk or lower investment potential.
Investors use the cash on cash return calculation to set investment goals and benchmarks. This helps guide their investment strategy and allows them to track progress toward their financial objectives.

Pros and Cons of Calculating Cash on Cash Return

While cash on cash return offers simplicity and comparative analysis for evaluating investment properties based on current cash flow and initial investment, it has limitations in scope, financing considerations, and the time value of money. Here are the pros and cons of using cash and cash return as a metric:

Advantages of Calculating Cash on Cash Return:

Cash on cash return is a straightforward calculation that provides a precise percentage, making it easy for investors to compare and evaluate investment opportunities.
It focuses on the cash flow generated by the property, considering the rental income and operating expenses.
Cash on cash return enables investors to compare different investment options and identify properties that offer higher potential returns.

Disadvantages of Calculating Cash on Cash Return:

Cash on cash return does not account for factors like property appreciation, tax benefits, or potential future market conditions.
It does not account for the effect of what borrowing funds for buying the property can have on the overall return.
Cash on cash return does not take into consideration the time value of money, as it does not factor in the timing of cash flows or the impact of inflation.

Cash On Cash Return Calculator FAQs

What is a good cash on cash return?

What makes cash on cash return “good” depends on factors like the investor’s risk tolerance, market conditions, and investment goals. A higher cash on cash return indicates a greater return on the cash invested, making a real estate asset attractive to investors.

What is the difference between cash on cash return and cap rate?

Cash on cash return and capitalization rate are both real estate investment metrics, but they measure different aspects of profitability. The former focuses on the return generated on the initial cash investment, taking into account cash flow. On the other hand, the cap rate assesses the relationship between a property’s net operating income and its market value.

Is cash on cash return the same as ROI?

No, cash on cash return is not the same as ROI (return on investment). Cash on cash return measures explicitly the return on the cash invested in a property. In contrast, ROI is a more comprehensive measure that considers the total return on the investment, including both cash and non-cash components.

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Cash on Cash Return Calculator for Real Estate Investors