Why is cash-on-cash return on rental properties important to know?
It can be incredibly difficult to calculate the actual return on investment (ROI) for rental properties. You must consider actual returns like cash flow and tax benefits as well as returns that are not realized until a sale or refinance, such as appreciation and equity pay down. A much easier way to calculate the returns on rental properties is to figure the cash-on-cash return. This return is simply the amount of cash you initially invest into the property compared to the income generated by that property. Cash-on-cash does not factor in unseen returns like appreciation, equity pay down, or even tax benefits. The great thing about cash-on-cash return is if you can make a decent return just from the income, then all the other benefits are a bonus.
Instructions for the cash flow calculator
- Fill in cells highlighted in yellow.
- If you are missing certain values, head over to our Rental Property Cash Flow Calculator first.
- Cells highlighted in green will show your results.
Notes about the cash-on-cash calculator
1. Cash-on-cash is tricky to figure, because you may not be paying all of your costs at the same time. I may pay for the down payment and closing costs at closing, but I won’t pay for the repairs until they are completed and I payed the earnest money well before closing. Because of this it is hard to know when to start the cash on cash returns. Cash on cash is not an exact science, but a way to measure your returns on your investments.
2. When you buy a home that needs a lot of repairs, it can take weeks or months to repair. When the home is sitting vacant, it is not making any money and actually costing you money. You may have to make mortgage payments, pay HOA fees, pay utilities or other costs while the home is vacant. These costs need to be considered when calculating cash on cash returns.