WHAT IS CASH ON CASH RETURN?

Seth Peterson
Seth Peterson
Published on November 9, 2018

When purchasing income property, there are many ways of looking at it to see if it is a good investment.  It’s probably a good idea to look at more than just one formula before deciding to purchase a property.  One formula you should at least take a look at is the Cash on Cash Return.  This compares your net cash flow to the total amount of cash you have invested in the property: NET CASH FLOW / TOTAL $ INVESTED.  Some Cash on Cash formulas say to compare cash flow to the down payment, but I think it is wise to include your closing costs and initial repairs/maintenance to this Cash on Cash formula.  So “Total $ Invested” is the Down Payment, Closing Costs, and initial Maintenance/Repairs. 

Generally speaking, the return on investment for the stock market is about 10% per year on average over the past 20 years.  And mutual funds are about 2 points below, near 8%.  So you want your Cash on Cash Return to to be in that 8-10% if possible.  Due to the capital appreciation of real estate (4-5% per year on average), it would probably be okay to have a Cash on Cash Return even a little lower than 8-10%.  Obviously the higher the better!

For example, let’s say you are looking at a property that will have purchase price of $180,000.  A 25% down payment for that property would be $45,000.  With closings costs and a little maintenance, let’s say total investment is $50,000.  The next thing to look at would be net cash flow.  Let’s say this particular property will cash flow $350/month…or $4,200/year.  $4,200/$50,000 = 8.4%.  That is very similar to stocks & mutual funds, and means that it might be a good investment!

Sources:

http://observationsandnotes.blogspot.com/2009/03/average-annual-stock-market-return.html

http://www.fool.com/school/mutualfunds/performance/record.htm

Want to know the value of your home?
Our staff will figure it out for you for FREE.

Let's Talk Real Estate!

chat_bubble
close
Get A FREE Home Valuation!
LET'S DO IT!
X