Part Two: Cash-on-Cash Return // How to Calculate the Return on Investment of a Rental Property

This is the second of a three part series to help the new or potential investor learn the basics of calculating the return on investment of a rental property.

This article will be most helpful for a rental property owner who has a mortgage on a rental property - perhaps it was home you bought with a 5% owner-occupied down payment and you’re now considering renting it out when you move into a new home.

Check out parts one and three of this series here:

Part One: Cap Rate - helpful if you are considering making a full-cash purchase or considering the market value of a rental property you plan to sell

Part Three: Return on Equity - helpful as your rental property value changes or if your mortgage gets paid down (or paid off) 

Note: This article focuses on basic cash flow calculations and does NOT take into account your individual potential tax implications. Please consult with a CPA prior to making any decisions.

Cash-on-Cash Return

Cash-on-Cash return is used most commonly for someone who buys a home with a mortgage.

This technique measures the return on investment, not based on the total price of the home, but of the owner’s personal financial investment.

The math would look something like this:

Annual Income - Annual Expenses (aka Annual Net Profit) / Owner’s Personal Investment = Cash-on-Cash Return

  • Owners Personal Investment: $300,000 purchase price * 20% downpayment = $60,000 + $6,000 closing costs = $66,000

  • Annual Income: $2,000 rent per month * 12 = $24,000

  • Annual Expenses: $1400/mo (mortgage, taxes, insurance, maintenance/utilities + $100 reserves = $1500/mo * 12 = $18,000

  • Annual Net Profit: $24,000-$18,000 = $6,000

  • Cash-on-cash calculation: $6,000 / $66,000

  • Cash-on-Cash Return: 9%

The primary ways to IMPROVE cash-on-cash return are to:

a) INCREASE the gap between the Income and EXPENSES by ensuring that annual rent increases are greater than increases in annual expense.

b) DECREASE your personal investment while maintaining annual net profit (most commonly done through a cash-out refinance). When maximized this can create the highly coveted “infinite returns.”*

For more on the power of leverage in real estate and cash-on-cash returns, check out my video here.

*The concept of earning profit on a property that you have no personal funds invested in.

What are your options?

If you do the math and believe a rental property will be a worthwhile investment, feel free to reach out to me if you’d like a “second set of eyeballs” on your situation.

If you’re considering selling instead of renting, or have a rental home that no longer makes financial sense, please reach out to me for a confidential selling consultation.

There might be important tax deadlines to consider or creative options such as a 1031 Exchange that allow you to stay involved in owning investment real estate that will provide you a greater ROI.

Check out parts one and three of this series here:

Part One: Cap Rate - helpful if you are considering making a full-cash purchase or considering the market value of a rental property you plan to sell

Part Three: Return on Equity - helpful as your rental property value changes or if your mortgage gets paid down (or paid off) 


If you have a desire to buy or sell in the coming year, let’s chat.

Life has a way of keeping us all moving, and I’d love to be your real estate agent.

Contact me here to set up your free and confidential consultation.

Kevin

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Part Three: Return on Equity // How to Calculate the Return on Investment of a Rental Property

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Part One: Cap Rate // How to Calculate the Return on Investment of a Rental Property