![]() ![]() Debt service is not included as an expense when calculating NOI, whereas cash-on-cash includes the debt service expense. Projected net operating income is calculated by subtracting all of the budgeted property operating expenses such as landscaping, utilities, maintenance, and a vacancy allowance from the total potential income a property generates when 100% leased. Now, let’s look at some of the other common real estate financial metrics used to evaluate real estate asset performance: NOI We’ve already discussed the difference between CoC and cash flow, how to calculate cash on cash, and what the cash-on-cash return calculation is used for. How is cash-on-cash different from other real estate investing metrics? Cash-on-cash return for the second year then becomes $11,500 / $50,000 = 23% versus the 20% we saw during the first year of example #3. Remember that if rents go up by more than expenses, you’ll get a multiplier effect on net cash flow. In the second year of owning the property discussed in example #3, let’s assume rents are increased by 10%, resulting in a 15% increase to net cash flow. Note that in this example you don’t add the $4,000 capital expense to the denominator because you covered the cost out of cash flow, not new equity. The property in the above example #3 needs a new HVAC system, total cost $4,000. ![]() Property purchased for $50,000 down with $10,000 annual cash flow after debt service : $10,000 / $50,000 = 20% cash-on-cash return. ![]() Now, let’s look at five examples of how cash-on-cash returns are calculated in different real estate investment scenarios : Example #1 5 examples of how to use a cash-on-cash return So, $2,700 is your annual cash flow and 2.7% is your (somewhat shabby) cash-on-cash return. According to the current rate is about 2.7% and you’d receive $2,700 each year. Let’s say you deposit that same $100,000 in a CD. Here’s another way to think about CoC compared to cash flow. Cash-on-cash tells you what kind of return you’re receiving for the total amount invested (acquisition equity plus subsequent equity infusions). Second, cash flow shows you how much money you’ll have available at the end of the day to deposit into your bank account after all of your expenses have been paid (except income tax).First, as shown in the example above, cash-on-cash is expressed as a percentage while cash flow is expressed as an amount.Is cash on cash return the same thing as cash flow?Ĭash-on-cash return is different from cash flow in two ways: Excluding tax from the calculation makes it easier to make an apples-to-apples comparison of different outcomes across real estate investments (and investors). The CoC from an investment property is the same regardless of who owns it, but the amount of income tax paid differs from investor to investor. The tax in the cash-on-cash calculation refers to the investor’s specific tax situation. Why is tax excluded from the cash-on-cash calculation? The High Road: Annual before-tax cash flow (but after interest payments only) / Total cash invested = Cash-on-cash return (with principal)įor instance, $10,000 annual before-tax cash flow + 2,000 principal debt payments / $100,000 total cash invested = 12% cash-on-cash return. The Low Road: Annual before-tax cash flow (but after all debt service) / Total cash invested = Cash-on-cash returnįor instance, $10,000 annual before-tax cash flow / $100,000 total cash invested = 10% cash-on-cash return. This essentially means there are two formulas for calculating the cash-on-cash return for a real estate investment: How do you calculate the cash-on-cash return for a rental property?įiguring out the cash on cash percentage is relatively easy, but keep in mind that it’s usually expressed net of debt service and, at your option, can include or exclude principal debt payments. Simplify your rental property reporting Learn More ![]()
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