Cash-on-Cash Return Calculator – Find your answer in 3 minutes!
Why Calculate the Cash-on-Cash Returns Metric?
The Cash-on-Cash Return calculator will provide you with a view of the investment property’s performance by considering only cash invested upfront versus the net cash flow in the first year of operations. When considering an real estate investment opportunity, this metric will help you forecast if you will be cash flow positive.
The formula for the Cash-on-Cash return can be broken down as follows, and expressed as a %.
- Cash-on-Cash Return = (Net Cash Flow) / (Total Cash Invested)
- Cash-on-Cash Return = (Revenue – Operating Expenses – Mortgage Payment) / (Down Payment + Start-up Expenses)
- Here is helpful video I like, which is < 3 minutes and dives into the numbers.
Pros and Cons of using the Cash-on-Cash Return Metric
| Pros / Benefits | Cons / Drawbacks |
|---|---|
| Provides an immediate understanding of your cash benefits. | First year was focused, which is not ideal for measuring performance over time. |
| A positive Cash-on-Cash metric indicates that the other key real estate metrics such as the Cap Rate and ROI may also be positive. | The cash-on-cash return calculator doesn’t help you estimate long-term returns. If that’s needed, use the deeper ROI calculator. |
| High accuracy as you deal with cash figures over a short period of time (1-year) | It doesn’t take into account changes to your rent, expenses, and property value over time. |
| Takes into account all upfront costs such as your down payment, closing costs, and any repairs and renovations. | Cash-on-cash is not a universal metrics to use when comparing real estate with other investments such as stocks. ROI is preferred cross-investment metric. |
| Great starting metric when narrowing down and filtering for investment options worth diving into. |
Start Here to Calculate your Cash-on-Cash Return
- Keep a copy for yourself by entering your e-mail address in the Summary section of the Cash-on-Cash Return Calculator.
- If you need help understanding the calculator fields, use the Cash-on-Cash Return Calculator guide further down the page.
- For a detailed understanding of the Cash-on-cash return metrics, as well as other helpful real estate metrics such as Capitalization Rate (Cap Rate) and Return on Investment (ROI), check out the Ultimate Guide to Real Estate Investment Metrics.
Cash-on-Cash Return Calculator Guide
1. Transaction and Start-up / Closing Costs:
- Purchase Purchase Price: The total cost of acquiring the property.
- % Down Payment: The percentage of the purchase price you pay upfront.
- Down Payment: The actual amount you pay upfront.
- Legal and Regulatory Fees: The costs associated with the legal transfer of the property, including your attorney fees, mortgage discharge, setup or transfer, utility and property tax ownership transfer, government fees and taxes, liens, title insurance, and more.
- Renovation and Repairs: The cost of any necessary renovations or repairs to make the property rentable or increase its value.
- Other Fees and Expenses: Any additional costs related to the purchase, such as appraisal or home inspection fees.
- Land Transfer Tax: A tax the government imposes on the transfer of property ownership.
- Annual Property Growth Rate: The expected annual property value increase.
2. Mortgage Details:
- Mortgage Insurance: Generally, if your down payment is less than 20% of the property’s value, you may need to pay for mortgage insurance. This gets added to your mortgage amount.
- Mortgage Amount: The total amount borrowed from a lender once you deduct your down payment and add your mortgage insurance.
- Interest Rate: The annual interest rate on your mortgage. Conventional mortgages will have the option of a fixed or variable rate that adjusts if the government moves their rate up or down.
- Term (Amortization in Years): The number of years you will amortize the mortgage. The longer the amortization period, the lower the monthly payment. However, extended amortization periods will also result in more interest paid.
- Monthly Mortgage Payment: This is auto-calculated. You’ll pay monthly to service the mortgage, including principal and interest.
3. Estimated Rental Price and Expenses:
- Rental Estimate: The expected monthly rental income from the property.
- Property Taxes: The property taxes you pay each year to the government. They tend to be split up over monthly payments.
- Maintenance Costs or Fees: Any monthly or annual fees for maintenance of the property or common areas. This usually applies to condos, townhomes, or HOA properties.
- General Repairs: An estimate of ongoing maintenance and repair costs.
- Property Management Fees: Fees when you hire a property management company. This includes services such as finding and vetting tenants, managing issues, collecting rent, and performing minor repairs.
- Occupancy Rate: The percentage of time the property is expected to be rented out. You may need to plan for tenant gaps if your area has high tenant turnover. This is the inverse of the vacancy rate.
- Fee to Find a Tenant: The costs of using a real estate agent to find a tenant, and if not, Any expenses you incur with advertising, background checks, and tenant placement.
- Alternative Investment/Discount Rate: The rate of return you could earn from alternative investments if you didn’t invest in real estate. This helps assess the opportunity cost of your investment.
4. Monthly Utilities:
- Water, Electricity, Heat: Specify which utilities you, as the landlord, will be responsible for paying. Some landlords include utilities in the rent, while others pass them on to the tenants. When possible, have the tenants set up direct agreements with the utility providers. This allows them to only pay for what they use, and if there are any payment issues, it doesn’t land on you (the landlord).
- Internet: Similar to utilities, specify whether you’ll include internet in the rent or have tenants set up their accounts.
- Content/Tenant Insurance: Determine if you’ll require tenants to have renters’ insurance and whether you’ll factor this cost into your calculations.
The Cash-on-Cash return calculator is great for cash flow focus. However when considering long-term investments plan, ROI is the ideal metric. Adding in the consideration of tax implications of your real estate investment plan needs to be considered. Overall, understanding risk is of paramount importance investing. Learn more when comparing the 16 must ready and cons of real estate. The cash-on-cash return calculator is intended as a support tool. You should consult your financial advisor, accountant, or real estate help to inform your decision.