How To Determine A Good Cash On Cash Return

You may not be familiar with Cash on Cash return simply because you are not living in the real estate world. To start with it, cash on cash return formula is as follows: Cash return is equivalent to the net operating income over total cash investment The total cash investment/s consists of all expenses that can let the rental property equipped and operational. The net operating income on the other hand is the monthly rental the landlord receives from the rental property.  The calculation is different from a rental property purchased in cash and loan. To further explain, check out calculation below:

No Loan

Fortunately for others, they can pay a rental property in cash, and to this, they are given the opportunity to make more money from the property. To calculate CoC for rental property acquired in full, follow the calculation below: Rental property cost: $300,000 Expenses: $500 (for rental property operational expense) Rent a month: $2000 Monthly income: $2000 – $500 = $1500 Annual income: 12months X $1500 = $18,000 Con Cash Return: $18000 / $300,000 = 6%

With Loan

Sure, not everyone can pay $300,000 or even lesser, immediately, hence acquiring a loan to get a rental property is considered. Needless to say, it is a good investment, hence getting a loan is not a bad idea at all. To calculate for CoC with rental property acquired using a loan, follow calculation below: Rental property cost: $300,000 Expenses: $500 (for rental property operational expense) + $500 (debt service) (the amount varies on the mortgage rates) = $1000 Rent a month: $2000 Monthly income: $2000 – $1000 = $1000 Annual Income: 12months X $1000 = $12,000 Cash on Cash Return: $12,000 / $300,000 = 4%