A cash-on-cash (CoC) return calculator is an essential investment tool for any property investor. Calculating the cash on cash return is a quick way to determine the profitability of any property investment. Using the amount of your cash investment and your annual pre-tax income, you get a percentage figure. The cash-on-cash return calculator’s result is a good indication of the property’s potential.
Simplicity is one reason why investors use cash-on-cash return calculators. You get a simple metric that you can use to compare or evaluate properties. Even though working out your income this way has its limitations, you get enough information to make an informed decision on your investment property.
The cash-on-cash return calculator uses two basic figures to assess any real estate investment. These are your cash investment and annual income.
Before using the cash return calculator, you will need to calculate the expected first year of annual income—this includes rental income, parking, and other due payments.
Then, you will need to gather some data about the cost of your investment. You will need the following information for RentDrop’s cash return calculator:
- Down payment
- Closing costs
- Repair costs
- Bank loan costs
- Seller concessions- Utilities and other additional costs during vacancy (e.g., property taxes and insurance)
After you enter all the values into the calculator, including the projected annual pre-tax income, you will get a percentage. The higher the percentage—the better investment and higher annual profit you can expect. In most cases, a solid investment could be any property with a CoC return between 8% and 12%. Anything above 12% will usually make you a lot of money.
Here’s an example of how the cash-on-cash return calculator works.
Let’s say you invest $80,000 in the property. This includes mortgage payments, utilities, repairs, and down payment. Say that annual income from the property is $7,500. Using the cash-on-cash formula, you end up with a decimal figure of 0.094 ($7,500 ÷ $80,000). Multiply the result by 100, and you see that the cash-on-cash return is 9.4%.
Using the simple formula to calculate the cash-on-cash return is something every real estate investor should learn. The method helps you to evaluate the profitability of a potential investment. The calculator also makes property comparison straightforward. You can also assess the possible return on different types of investment properties.
While the cash-on-cash return calculator is a valuable tool, it has some limitations. For example, it can be tricky to get an accurate figure if a rental property requires extensive repairs that may take many months. Also, down payments, closing costs, and paying contractors could happen at different times.
Some other variables that can affect the cash-on-cash return include:- Your individual tax situation
The difference between cash-on-cash return and ROI is that CoC return only looks at the profits relative to the investment cost. Return on Investment calculations take into account loans, appreciation, tax benefits, and many more variables.
The cash-on-cash return calculation is an essential tool for any real estate investor. It doesn’t matter if you’re a startup landlord or an experienced property investor, working out the CoC return will help you make the best real estate investment decisions.
Total cash invested