What is a Cash-on-Cash Return in Real Estate Investing?

Real Estate Investing

When a real estate investor is evaluating potential properties to invest in, there are many metrics that they can use to do so. One of these metrics is the cash-on-cash return; sometimes, it is called a cash yield. The cash-on-cash return is the cash income that an investor can earn on the cash they invested in the property.

According to Investopedia, "cash-on-cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year. It is considered relatively easy to understand and one of the most important real estate ROI calculations." In this article, we will look at everything you need to know about cash-on-cash returns.

What Does a Cash-on-Cash Return Tell You?

The cash-on-cash return gives you a fast way to determine if you should invest in a property. It also can help you figure out what price you would need to purchase the property at in order to meet your goals for the profit on a property you are investing in.

It is important to note that the debt related to the property is not factored into the cash-on-cash return. If there is a mortgage on the property, it will not be factored in; only your down payment and closing costs are included in the cash-on-cash return.

Factors That Increase or Decrease Cash-On-Cash Return

There are a few factors that can increase or decrease a cash-on-cash return:

  • Down payment amount
  • Monthly rent price
  • Property taxes
  • Vacancy
  • Costs to renovate or update the property
  • Operating expenses

Understanding Cash-on-Cash Returns in Real Estate Investments

A cash-on-cash return is intended to give you an idea of how a real estate investment will perform. It essentially gives an investor an analysis of the potential cash they will earn over the lifetime of the investment. It is often used for a property that has a long-term debt borrowing.

How Is Cash-on-Cash Return Calculated?

To calculate the cash-on-cash return, you divide the annual cash flow before taxes by the total money invested.

Annual Pre-Tax Cash Flow / Total Cash Invested = Cash-on-Cash Return

Here it is in some easy steps:

  • Calculate your monthly cash flow. Take your income for the month from the property, then calculate your monthly expenses, and subtract the expenses from the income.
  • Calculate your annual cash flow. Take your monthly cash flow and multiply it y 12 to determine your annual cash flow.
  • Divide your cash flow by your cash investment. This will give you a decimal figure, which you then multiply by 100 to convert it into a percentage.

Example of Cash-on-Cash Returns

Let's say you are investing in a rental property for $100,000, and you can pay that in cash. You then rent out the property for $3,000 a month, and your upkeep expenses each month are $1,000. This means your annual pre-tax cash flow is $24,000, which you then divide by the $100,000 that you invested, making your cash-on-cash return 24 percent. 24,000 / 100,000 = 24%.

Cash-on Cash-Calculator

To make it easier for you to calculate the cash-on-cash return on a property. By inputting your assumptions around the property's purchase, income, expenses and disposition assumptions, you can estimate and visualize what the returns on the property might look like.

Be sure to check out our explanations of other important investment metrics such as the property's cap rate and the property's internal rate of return.

Cash-on-Cash Return vs. Return on Investment (ROI)

You have probably seen cash-on-cash returns and ROI used interchangeably, but they are not the same thing. Your cash-on-cash return measures the return on the cash you invested, which can actually be more accurate than ROI when determining how well a property will do over the investment's lifetime. ROI is the total amount of the return you will get on your investment overall, including factors beyond the direct performance of the investment, like out-of-pocket expenses and any loans used to purchase the property.

What is a "Good" Cash-on-Cash?

When it comes to investments, there is no magic number that you need to aim for with your cash-on-cash return; it is subjective. While many investors prefer a cash-on-cash return between eight percent and 12 percent, some will say that a cash-on-cash return of as low as five percent can be good in some markets.

If you are just starting to invest in things, investing in a property with a lower cash-on-cash return may be less risky for you and could be more worthwhile in the beginning. If the market you are investing in is currently starting to grow, it also may have a lower cash-on-cash return, but this does not always mean it is not a good investment. The market can grow over time, getting you an even better return than is initially anticipated.

Your cash-on-cash return rate is going to vary depending on how much you spend out of pocket on the property and how you structure your cash flow.

Cash-on-Cash Returns for Vacation Rentals

Rental properties can offer a good cash-on-cash return to an investor, but short-term vacation rentals can offer an even higher return than a traditional rental property. This makes vacation rental properties a popular and lucrative way for an investor to enjoy a high cash-on-cash return. The cash-on-cash rate does especially well when it is on a platform like AirBnB, since that makes it more publicly accessible to potential vacationers. These have also become popular for locals who are looking to get away from their house for a weekend without having to travel, making this an even more lucrative investment.

Final Thoughts

You can use a cash-on-cash return to get a good overview of an investment property's potential before you choose to invest in it. This is only one metric used in investment properties, though, so it is a good idea to also look at other metrics before you commit to investing. However, it is important to keep in mind with any investment that they are looking at things as they are right now; they are not a crystal ball into the investment. The cash-on-cash return can tell you what kind of money you can get from investing in a building if you invest today for the next year or so, making it a fairly accurate analysis to look at when investing.

Be sure to check out our other guides on important investment metrics such as a property's cap rate and internal rate of return as well.

Certain information contained in here has been obtained from third-party sources and/or artificial intelligence (AI) and is intended for informational, entertainment, or educational purposes only. While we strive for accuracy, we cannot guarantee that the information presented on this blog is free from errors, omissions, or biases. Getaway has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. It is important to do your own research and consult with a certified financial advisor or accountant before making any investment decisions. References to any investments or assets are for illustrative purposes only and do not constitute a  recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any investments. Charts and graphs are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

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