How To Calculate Cash on Cash Return
Real estate investors often turn to the cash on cash return when considering a real estate investment property. So let’s take a look.
Two primary components make the cash-on-cash calculation
1. The property’s expected cash flow during the first year
2. The amount of initial investment made by the investor to purchase the property
Cash flow during the first year is simply the amount of money expected to flow in less the amount of money expected to flow out.
For example. If a property is expected to generate an income of $50,000 during the first year with operating expenses of $20,000 and a mortgage payment of $25,000, the cash flow for the first year would be $5,000 (50,000 less 20,000 less 25,000 equals 5,000).
The initial investment comprises what the investor invests to make the purchase. Namely, down payment, loan points, and cost of acquisition (escrow and title fees, appraisal, and inspection costs).
For example. Let’s assume a downpayment of $90,000, loan points of $5,000, and acquistion costs of $5,000. The initial investment (the money spent to make the purchase) is $100,000 (90,000 plus 5,000 plus 5,000 equals 100,000).
The Calculation
Cash Flow / Initial Investment = Cash on Cash Return (CoC)
$5,000 / 100,000 = 5.0% (CoC)
Viola!
