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Welcome to the Ultimate Guide to Cash on Cash Return on Investment for real estate investors (also known as “Cash on Cash ROI”). In this guide, we will start by discussing what the basic definition of cash on cash return on investment is and then move on to much more advanced and nuanced topics related to cash on cash.
Cash on Cash Return on Investment is defined as the Net Operating Income (often abbreviated as NOI) minus all Mortgage Payments divided by the Purchase Price. In The World’s Greatest Real Estate Deal Analysis Spreadsheet™ cash on cash return on investment is calculated for you.
Unlike Cap Rate that does not take into account the financing you have (or can get) on the property, Cash on Cash Return on Investment does take into account the financing you have (or can get) on the property and the amount of money you invested in the property.
How To Calculate Cash on Cash Return On Investment
Calculating Cash on Cash Return on Investment is easy. Follow these simple steps using an example property.
Cash on Cash Return On Investment
| Annual Cash Flow | $1,547.12 | |||
| ÷ | Total Cost to Close | ÷ | $67,896.92 | |
| Cash on Cash Return on Investment | = | 2.279% |
Let's walk through calculating Cash on Cash Return on Investment for 
Typical 25% Down Payment Gainesville, Florida Rental Property.
Ultimately, we will need Cash Flow and the Total Cost to Close when buying the property.
Let's first start with calculating the Cash Flow on Typical 25% Down Payment Gainesville, Florida Rental Property
Cash Flow is really taking the total amount of money that we could possibly earn on the property, what we call Gross Potential Income, and substracting out an allowance for the expected vacancy, what we then call Gross Operating Income.
Then, from the Gross Operating Income, we substract out all the expenses of operating the property, Operating Expenses, to get the Net Operating Income.
Armed with Net Operating Income, we can then subtract out the expenses of financing the property to determine utlimately how much Cash Flow we have.
So, let's start with Gross Potential Income first.
Annual Gross Potential Income
| Annual Rent | $27,720 | |||
| + | Annual Other Income | + | $0 | |
| Annual Gross Potential Income | = | $27,720 |
Gross Potential Income is how much total income the property could possibly produce from all sources.
For Typical 25% Down Payment Gainesville, Florida Rental Property we take the total amount of rent they could collect and any additional income they might also get from the property.
The rent for Typical 25% Down Payment Gainesville, Florida Rental Property is estimated to be $2,310 per month or $27,720 per year. We'll use the annual amount of $27,720 for our calculation and we will, for now, ignore vacancies... we'll deal with vacancy when calculating Gross Operating Income.
We're estimating $0 in other income from the property.
Some common examples of other income might be: profits from on-site laundry (especially in multi-family), pet rent, renting out extra spaces on the property (like an extra garage or storage unit) or things like that.
That means that Typical 25% Down Payment Gainesville, Florida Rental Property has a Gross Potential Income of $27,720 per year.
But that does not consider the impact of vacancy. To do that, we'll look at Gross Operating Income next.
Annual Gross Operating Income
| Annual Gross Potential Income | $27,720 | |||
| - | Annual Vacancy Dollar | - | $832 | |
| Annual Gross Operating Income | = | $26,888 |
Gross Operating Income unlike Gross Potential Income does take into account the impact of vacancy on the property.
For Typical 25% Down Payment Gainesville, Florida Rental Property, we're estimating that the property is vacant 3% of the time. That means that we're not seeing $831.60 of the $27,720 that we thought we might get from the property.
Annual Gross Operating Income
| Annual Gross Potential Income | $27,720 | |||
| - | Annual Vacancy Dollar | - | $832 | |
| Annual Gross Operating Income | = | $26,888 |
Now that we have Gross Operating Income we will be moving on Net Operating Income, but to calculate that we first need to calculate the Operating Expenses.
Annual Operating Expenses
| Annual Property Taxes | $0 | |||
| Annual Property Insurance | $4,007 | |||
| Annual Homeowner's Association Fees | $0 | |||
| Annual Landlord-Paid Utilities | $0 | |||
| Annual Other Expenses 1 | $0 | |||
| Annual Other Expenses 2 | $0 | |||
| Annual Property Maintenance | $2,689 | |||
| Annual Property Management | $0 | |||
| Annual Operating Expenses | = | $10,097 |
Operating Expenses are all the expenses of operating the property except vacancy and financing of the property.
For Typical 25% Down Payment Gainesville, Florida Rental Property we used the following:
- Property Taxes - These are the property taxes paid for the property. For Typical 25% Down Payment Gainesville, Florida Rental Property, we've estimated they are $0 per year.
- Property Insurance - This is the insurance policy to cover the property from perils like fires and liability from injuries on the property. Your specific policy will define what hazards you're covered for. This policy typically does not cover the personal property of tenants; they should get their own renter's insurance policy to cover that. For Typical 25% Down Payment Gainesville, Florida Rental Property, we've estimated the cost of this insurance policy to be $4,007.22 per year.
- Homeowner's Association Fees - This is usually the cost for the homeowner's association (HOA) where the property is located. What the HOA coverages varies widely between different HOAs so be sure to check with the HOA to find out what is included for your HOA fee. For Typical 25% Down Payment Gainesville, Florida Rental Property, we've estimated the cost of the homeowner's association fees to be $0 per year.
- Landlord-Paid Utilities - With many single family homes... and to a slightly lesser extend... duplexes, triplexes adn fourplexes... the tenants all pay individually metered utilities. However, in some cases... especially for larger multi-family properties... the landlord is responsbile for some shared (or in some cases... all) utilities. This is just for the utilities that the landlord is responsbile for paying. Tenant-paid utilities should not be included here. It is not uncommon to have this be equal to zero especially for smaller properties. For Typical 25% Down Payment Gainesville, Florida Rental Property, we've estimated the cost of the landlord-paid utilities to be $0 per year.
- Other Expenses - Sometimes a property will have an extra expenses associated with it. Some examples might include lawn service, snow removal, common area cleaning, etc. For smaller properties, it is not uncommon to have these extra expenses be equal to zero. For Typical 25% Down Payment Gainesville, Florida Rental Property, we've estimated the annual cost of these extra expenses to be:
- Other Expenses 1: $0
- Other Expenses 2: $0
- Maintenance - With many properties... especially residential properties... the landlord will be responsible for maintaining the properties and should set aside money to pay for on-going maintenance. For Typical 25% Down Payment Gainesville, Florida Rental Property, we've estimated the cost of maintenance, on average, to be $2,688.84 per year.
- There is some debate over whether you should include some or all of the Capital Expenses in the Operating Expenses or if they should be capital improvements to the property and not including in Operating Expenses. You can choose to include them by increasing the maintenance percentage or choose to include them elsewhere by excluding them from Maintenance.
- Property Management - With most properties, there will be an expense to managing the properties either in the form a professional property management fee or the... much lower hard costs... of managing the property yourself. For Typical 25% Down Payment Gainesville, Florida Rental Property, we've estimated the cost of property management to be 0% of the rent or $0 per year.
If we add up all of these expenses for Typical 25% Down Payment Gainesville, Florida Rental Property, we're estimating the Annual Operating Expenses to be $10,097.44.
Annual Operating Expenses
| Annual Property Taxes | $0 | |||
| Annual Property Insurance | $4,007 | |||
| Annual Homeowner's Association Fees | $0 | |||
| Annual Landlord-Paid Utilities | $0 | |||
| Annual Other Expenses 1 | $0 | |||
| Annual Other Expenses 2 | $0 | |||
| Annual Property Maintenance | $2,689 | |||
| Annual Property Management | $0 | |||
| Annual Operating Expenses | = | $10,097 |
Since we have the Gross Operating Income and Operating Expenses, we can now calculate Net Opearting Income.
Annual Net Operating Income
| Annual Gross Operating Income | $26,888 | |||
| - | Annual Operating Expenses | - | $10,097 | |
| Annual Net Operating Income | = | $16,791 |
Net Operating Income is how much money you're making from the property after vacancy and all the Operating Expenses except for the financing expenses on the property (like the mortgage payment and, if applicable, private mortgage insurance).
For Typical 25% Down Payment Gainesville, Florida Rental Property we would use the Gross Operating Income of $26,888.40 per year and subtract out all the Operating Expenses of $10,097.44 for the year.
That would result in a Net Operating Income of $16,790.96 per year or $1,399.25 per month.
Annual Net Operating Income
| Annual Gross Operating Income | $26,888 | |||
| - | Annual Operating Expenses | - | $10,097 | |
| Annual Net Operating Income | = | $16,791 |
Now that we have Net Opearting Income we can calculate the Cash Flow on Typical 25% Down Payment Gainesville, Florida Rental Property.
Annual Cash Flow
| Annual Net Operating Income | $16,791 | |||
| - | Annual Mortgage Payments | - | $15,244 | |
| - | Annual PMI Payments | - | $0 | |
| Annual Cash Flow | = | $1,547 |
Cash Flow is really just Net Operating Income minus all the financing costs for the property. That's because Net Operating Income already accounts for vacancy and the other Operating Expenses for the property.
For Typical 25% Down Payment Gainesville, Florida Rental Property we have a Net Operating Income of $26,888.40 per year or $2,240.70 per month.
The monthly payment for the mortgage on Typical 25% Down Payment Gainesville, Florida Rental Property is $1,270.32. If we multiply that by 12, we get mortgage payments of $15,243.84 per year.
And the Private Mortgage Insurance premiums for Typical 25% Down Payment Gainesville, Florida Rental Property are $0. The total for the year is $0.
So, if we take the Net Operating Income and subtract the mortgage payments and private mortgage insurance (PMI) we get an annual Cash Flow of $1,547.12.
That's $128.93 per month in Cash Flow.
Annual Cash Flow
| Annual Net Operating Income | $16,791 | |||
| - | Annual Mortgage Payments | - | $15,244 | |
| - | Annual PMI Payments | - | $0 | |
| Annual Cash Flow | = | $1,547 |
Cash on Cash Return on Investment
| Annual Cash Flow | $1,547.12 | |||
| ÷ | Total Cost to Close | ÷ | $67,896.92 | |
| Cash on Cash Return on Investment | = | 2.279% |
That means that Typical 25% Down Payment Gainesville, Florida Rental Property has a Cash on Cash Return on Investment of 2.279%.
