Previous ArticleNext Article
There are a lot of ratios that can help estimate the amount of income that you can receive when you purchase an investment property. There is no one-size fits all approach to financial ratios because every investor has different methods of purchasing homes. You can spend the majority of your time reading up on financial reports and return on investment calculations and still fail as an investor. Do you know what is a cash on cash return for investment property? This is one method of real estate accounting that you can learn to give you the actual data to prove how successful your cash investments are for an investment property.
Cash on Cash Returns Defined
The cash that you use to invest can quickly be spent and virtually forgotten about. It can always be in the back of your mind what you have paid but measuring this cash against profits is important. What a cash on cash return means is the amount of money that you have invested is returned to you as a percentage of cash. As an example, let's say that you purchase a property for the low price of $75,000. You are new to real estate investng and found a great offer that required you to pay cash in full at purchase. Your property rent is $500 each month. This means you would have $6000 each year as income before expenses.
The cash on cash analysis gives you an approximate percentage of how much cash your cash has earned. If your expenses are $2000 each year, you would have a net cash flow of $4000 each year. Your cash on cash ratio would be $4,000 divided by $75,000. Using this example data would give you a cash on cash return of .053 percent annually. This calculation is different from a standard return on investment calculation. What you should be concerned with as an investor is how much cash you are earning free and clear.
When to Use Cash on Cash Ratios
it is important to know that your first year of being a property investor is challenging, exciting and frustrating. The cash on cash measurement is a tool that is often used in the first year of property ownership only. The reason for this is because there is no way that you can track your cash income as your property appreciates in value. As the property is worth more, it can throw your cash projections off balance and it could appear your are losing money. Most investors rely on the ROI formula of investment minus expenses to measure profits earned. It is easiest to use cash on cash when you are considering purchasing and after your first year of ownership.
You can quickly compare the data before the purchase and after the purchase to see if your earnings stayed true. There are likely to be fluctuations in your cash income due to repairs and hidden expenses that come up during the first real year of property ownership.