Cash on Cash Return = Annual Pre-Tax Cash Flow divided by the Total Cash InvestedExample: You purchase a $200K rental property for 30% down plus $4K in closing costs. You invest $10K cash in improvements. After expenses, your first year’s pre-tax cash flow is $12K. The Cash on Cash Return would be $12,000 / $74,000 = 16%.
How do you use it?
Cash on Cash return is one of the simplest and most versatile ways to evaluate real estate properties. You can quickly determine if an investment is performing favorably, as well as trying to detect if a property for sale is underpriced. (See also our cap rate blog post).
Calculating Pre-Tax Cash Flow
- Sum the annual income including rent, fees, laundry, parking, everything.
- Leave an allowance for vacancies.
- Subtract expected cash outlays, such as expenses (repairs, interest expense) and the mortgage payment.
If cash is extracted from a property, through a refinancing for instance, don’t include that cash in the annual cash flow, because that return of capital is not income and it would misleadingly inflate your rate of return.
Carefully Consider the Following
Cash on cash return is based on before-tax cash flow, so it does not consider the investor’s tax circumstances (although it could become more favorable after the tax saving depreciation expense is considered).
Cash on cash return also ignores property value appreciation.
It ignores what investments your cash flow could be reinvested in, thus neglecting the effects of compound interest.
How to calculate Cash on Cash Return in QuickBooks
If you are doing a forward looking calculation, you will not have income information about that transaction in QuickBooks, so you can do it all on paper or in Excel. (Perhaps basing your vacancies and expenses on actual comparable numbers, though.) If you have entered the purchase price already, you can calculate this with a few clicks and a simple calculator. To learn more (quickly), invest in our QuickBooks training for landlords and property managers today.
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If you enjoyed this, also read about the Cap Rate explained for Landlords and Real Estate Investors or the rest of our landlording blog.