Your New Pal - Cash on Cash Return

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Calculate the Loan Payment in Cash on Cash Return

This is the end to the means. The cash on cash return or return on investment is the all important number and will be used by you going forward not only to evaluate rental property deals, but also in evaluating additional potential investments across asset classes. Eventually, you will develop your own personal hurdle rate. Mine is 30% and I would be hard pressed to accept any deal, whether in real estate, stock or business that does not deliver a greater return than this. Warren looks at company earnings when evaluating an investment. This is his expected rate of return. Three dollars of consistent earnings on a $10 stock is a 30% rate of return.

Your cash on cash return in the property investment will be your monthly net income (all expenses removed including the loan payment) multiplied by 12 and then divided by your cash put into the deal, typically your down payment.

Cash on Cash Return = (Net Monthly Income x 12) / Down Payment

So, for example, if you are cash flowing $250 a month from a rental property and you have a down payment of $20,000 in the deal, you would have a 15% cash on cash return.

$250 x 12 = $3,000

$3,000/$20,000 = 15%

This metric will help you decide between properties. For example, if you are evaluating two properties, one with a 15% cash on cash return and the other with a 25% cash on cash return, then all things held equal, you would select the property with a 25% return. Of course if this doesn’t meet your hurdle rate, then you might want to continue looking. In your search you should apply the 100:10:3:1 ratio: You look at 100 properties, make offers on ten, three are accepted and you buy one. Also, don’t forget about phantom deduction add-backs. Tax savings through depreciation will provide phantom cash flow … this is an add back that you can use to calculate your rate of return, although I recommend using the before phantom cash flow number as your decision basis and then viewing phantom add-back as the icing on the cake.