How To Calculate Cash-On-Cash Return

Cash-on-cash return is a metric used to determine an investment’s net income as a percentage of total cash invested. This lets an investor know how much of their out of pocket investment they could earn back each year. This is a great, quick way to measure an investment’s potential performance. To calculate cash-on-cash return we need a few pieces: monthly net income, annual net income and initial cash investment. 

How To Calculate Cash-On-Cash Return

The formula to calculate cash-on-cash return is relatively simple. You just need to divide the annual net income by the total cash invested and then multiply that result by 100, giving you a cash-on-cash return percentage. 

Annual Net Income / Total Cash Invested x 100 = Cash-On-Cash Return 

Calculating Net Income

Now that we know the formula to calculate cash-on-cash return we need to know how to calculate our annual net income. We’ll start with monthly net income and then convert that to annual net income. To do this we’ll need to subtract our monthly expenses from our monthly income and then multiply that number by 12.

Monthly Income – Monthly Expenses x 12 = Annual Net Income

Income

The majority of your income will come from rent. But you should also consider other opportunities for income as well. This can come from things like garage spaces, laundry fees, non-refundable pet deposits, etc. The result of all of these things combined is your monthly income.

Expenses

Unfortunately, there are a lot of potential expenses involved with owning real estate. Here is a list of common expenses you can expect to pay while owning property.

• Mortgage – Principal and Interest
• Taxes
• Insurance
• HOA Fees
• Maintenance
• Repairs
• Property Management Costs
• Actual or Potential Vacancy Rate

Adding all of your applicable expenses together will result in your monthly expenses. You can now use these pieces to calculate your annual net income.

Total Cash Invested

Now we need the last piece for the equation, total cash invested. This is relatively-straight forward. You will have a down payment, closing costs and possibly pre-rental repairs. If your units are already rented when you close you may not have this expense. Basically, any money that you needed to pay out of pocket before you had any tenants.

Example

Let’s calculate cash-on-cash return with real numbers. 

Monthly Net Income – $1,400 Rent, $50 Garage Space = $1,450 

Monthly Expenses – $492 Mortgage, $400 Taxes, $60 Insurance, $200 Maint., Repairs, Vacancy = $1,152

Annual Net Income – $1,450 – $1,152 = $298 x 12 = $3,576

Total Cash Invested – $26,000 Down Payment, $8,000 Closing Costs, $1,500 Pre-Rental Repairs = $35,500

Cash-On-Cash Return – $3,576 / $35,500 = 0.100 x 100 = 10.07%

Cash-on-cash return can be a great metric to analyze a property. It can be especially useful for comparing one property to another, quick analysis of a property and how much financing you should use. Cash-on-cash return doesn’t take into consideration potential appreciation of the property or all of the risks that are involved with investing. This is a great screening tool and can help give you an overall idea of how an investment will perform, especially when used in conjunction with other metrics.