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How to Calculate Cash on Cash Return for Rental Real Estate

A key metric I often incorporate into my real estate investment strategy is what’s called cash-on-cash return. It’s a great method of determining potential profits and so it’s certainly worth the time to learn how to calculate cash-on-cash returns on any property you’re looking into.

This metric is commonly abbreviated as CCR and is calculated as a percentage. CCR values can be used to evaluate one property or compare several to determine which offers the best potential return.

Additionally, cash-on-cash returns can be achieved through a handwritten formula, an online calculator, or rental property calculator Excel spreadsheets that keep track of and calculate the numbers for you. I’ll touch on all three methods so you’ll have the tools you’ll need to check the profitability factor of the next single-family home or duplex you’re considering as an investor. With all that said, let’s get started.

Understanding Cash-On-Cash Return for Rental Properties.

I’ll begin with the basics, which would be the definition of cash-on-cash return, also referred to as cash yield. A CCR is the amount of pre-tax cash flow you bring in, such as rental income, compared to the amount of cash that would be invested into the property. The final value will give the investor a general idea if they should continue moving forward with the property purchase.

Rental Property Calculator Excel for Cash on Cash Return

This metric is used to determine a rental property’s efficiency and profitability, which in turn can help an investor steer clear of risky investments. For example, if you’re evaluating three different rental properties and calculate a cash-on-cash return on all three, the property with the highest value would be a wiser choice. Of course, the comparison would only be reliable if the market conditions and other elements that are not directly factored into the equation are the same for all three properties, and I’ll touch on this in more detail later.

CCR metrics can also give an investor an idea of how the rental property might pay back in terms of cash flow, not including property value appreciation or depreciation.

The formula for calculating a cash-on-cash return is dividing the annual pre-tax rental earnings from the cash initially invested into the property, which looks like this:

Cash-on-Cash Return = (Annual Cash Flow / Total Cash Invested) x 100

How to Calculate Cash-On-Cash Return

Here’s a quick example using a property with a purchase price of $300,000:

  • Purchase Price: $300,000
  • Down Payment: $60,000 (20% of purchase price)
  • Closing Costs: $6,000
  • Total Cash Invested: $60,000 + $6,000 = $66,000

Annual Cash Flow:

  • Monthly Rent: $2,500
  • Annual Rent: $2,500 x 12 = $30,000
  • Operating Expenses (maintenance, taxes, insurance, etc.): $10,000 per year
  • Net Operating Income (NOI): $30,000 – $10,000 = $20,000
  • Mortgage Payment: $12,000 per year
  • Annual Cash Flow: $20,000 – $12,000 = $8,000

Cash-on-Cash Return Calculation:

  • Cash-on-Cash Return = ($8,000 / $66,000) x 100 = 12.12%

The final cash-on-cash return comes to 12.12%. A good value is said to be anywhere between 8-12%, although many shoot for 10% and above.

Now that you have an idea of how to calculate the return by hand, I’ll cover a few calculation tools that can speed the process up.

Utilizing Rental Property Analysis CCR Tools – Calculators & Spreadsheets

If you’re not very good at math or you’re a bit confused about how to calculate cash-on-cash returns by hand using the above formula, there are various tools you can use instead. For example, there are online calculators, as well as rental property calculator Excel spreadsheets that can crunch the numbers for you.

Calculating Cash on Cash Return with a Rental Property Analysis

Here’s an online cash-on-cash calculator that you can get started with or play around with the numbers. Calculators such as these are good for quick evaluations, but if you want a more reliable value and want to put a little effort into the process, then I suggest using a spreadsheet.

Rental Property Analysis Spreadsheet

When it comes to using Excel to calculate your cash-on-cash return, you may find this to be the better option in comparison to online calculators and written formulas. Why is this the case? Because when using a rental property calculator Excel spreadsheet, you can add more details to the mix, customize it, organize it in an easy-to-understand fashion, create columns so several property comparisons are displayed on one page, as well as add property images and notes. It also enables you to keep a record of every cash-on-cash return calculation you’ve ever done for reference.

Here’s a simple cash-on-cash return spreadsheet to get an idea of what one may contain. Most investors either create the spreadsheet themselves or obtain one from a fellow investor because there are not too many you can download from the internet. I located one to provide as an example, and of all places, it’s found on Etsy. Even so, it does the job and allows you to compare up to 10 properties at once – Real Estate Investing Template (Cash-on-Cash Return). This type of rental property analysis spreadsheet will give you a broader view of the return you might expect from a property.

Interpreting and Evaluating Cash-On-Cash Returns

Ok, so we covered how to calculate cash-on-cash returns manually and what tools you’ll need to find the return for you, but what do you do with the final results? Well, you could just go by how high or low the percentage is, judging if it’s a good or bad return based on the acceptable 8-12% average. However, that really wouldn’t be a good idea.

You see, there is much more to deciding whether or not to move forward on a real estate deal than just evaluating its cash-on-cash return. There are other factors to consider. So, you start with the CCR calculation to determine if it may be a good deal or not. If it appears to be acceptable, you then look into other aspects that might affect the property, such as area crime, if properties are appreciating or declining in the general vicinity, and so on.

It’s crucial that you do your due diligence to find lucrative properties because when cash flow-positive rentals are added to your portfolio, it will put you on the path to financial independence. Head over to my post that covers why this is the case – Financial Benefits of Investing in a Rental Property that Can Make You Wealthy.

Evaluating Local Market Statistics

As mentioned, one factor that should be thoroughly looked into before investing in a property that sports a high CCR, would be the local crime rate. It’s important to know if there’s crime on the rise in the surrounding neighborhoods, and if that crime could possibly seep into the neighborhood you’re considering.

If it’s on the rise in nearby streets, then I would move on. The reason for this is because a property may yield a great cash-on-cash return right now, but in 5 years, if crime hits, that number will certainly decline, pulling your profits down along with it.

Investment Property Cash-on-Cash Return Calculation Tools and Formulas

You’ll also want to research the area’s job market, rental demand, as well as the city’s economy to see if it has a good chance of being taken down by a recession or not, or if it has what it takes to stand strong. Why is this important? Because if a city can be easily disabled by a recession or pandemic, then job rates will decline, people may move, and then vacancy rates go up. I suggest bookmarking my article on the topic for future reading; you’ll be surprised at how this city stood up to the COVID pandemic when many other locations crumbled – Lubbock Recognized as Recession-Proof City and Maintained a Strong Rental Market Throughout Pandemic.

Along with this, it’s important to compare cash-on-cash return alongside additional metrics like ROI, cap rate, and others. This is all part of the due diligence that will help keep you away from risky investments. I’ve covered quite a few rental property evaluation metrics over the past few months and I’m including that information below. It’s worth diving into the details to see which metrics might help you secure a good deal on your next rental property search:

Rental Property Evaluation Metrics

Secure Lucrative Rental Investments by Knowing How to Calculate Cash-On-Cash Return

I’ve talked about how essential it is to ensure you’re investing in a property that will be worth it financially in the long run, and because it’s such an important topic, I wrote a full post that goes into detail on it. Here’s one you can dive into when you have the time – Maximize Cash Flow by Investing in Properties that Deliver the Best Returns.

The fact that you’re here learning how to calculate a cash-on-cash return is a good start to smart investing. So, whether you’re utilizing the formula I provided, a rental property analysis spreadsheet, or a simple online calculator, you’re on your way to fine-tuning your investment strategy.

Power Resources for Real Estate Investors

Before we wrap things up, I’d like to share my power resources with you so you can check them out for inspiration – they have put many investors on the path to financial freedom and are worth looking into:

If you’d like to skip all the calculations altogether and invest in a property that has already been evaluated for positive cash flow, is brand-new, and sits in a location that has a high job growth rate and booming economy, then be sure to schedule a free 30-minute call.

We’re a full-service investment company that provides new construction rentals with a tenant and property manager placed for you. We make it super simple to start investing even if you have zero experience – it’s what we do best.

Grab a cup of coffee and watch my video below to get the ball rolling when it comes to securing your wealth through rental real estate:

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