Here’s a simple illustration for how to calculate cash-on-cash return for a real estate investment.
RentViewer clients who invest their own cash in real estate are interested in knowing their cash-on-cash return.
The key is to separate cash inflows and outflows from activities financed by debt.
See the Net Cash Flow Dashboard in our Catalog
While the illustration below is simple, you should know that the RentViewer team is here to automate complex calculations for you. Here’s an automation we implemented for a diversified real estate developer and manager: Net Cash Flow dashboard.
A real estate investor, let’s call him Andy, bought a property for $1 million. A year later, he sold it for $1.1 million. His cash-on-cash return was 51.9%.
Wait! How could that be?
How did I came up with 51.9%? Let’s dig a little deeper.
First, we will need to uncover more info about this investment. The Purchase price and the sale price alone aren’t sufficient for calculating the cash-on-cash return since Andy used debt to purchase the asset and he had other expenses.
Here are more details:
Purchase & Hold:
– Total purchase price: $1,000,000
– Loan: $900,000
– Down payment (cash): $100,000
– Closing costs, insurance, maintenance expenses (cash): 10,000
– Loan payments (cash): $25,000 (Principal = $5,000 and Interest = 20,000)
– Selling price: $1,100,000
– Loan payoff: $895,000
Cash Outflow and Inflow:
Total cash outflow = $100,000 + $10,000 + $25,000 = $135,000
Total cash inflow: = $1,100,000 – $895,000 = $205,000
Cash-on-Cash Return = (Inflow minus Outflow) divided by Outflow
For the above investment, Cash-on-Cash return = ($205,000 – $135,000)/135,000 = 51.9%
Your Chart of Accounts
The above example is simple. If you want to make how to calculate cash on cash return easy, then make sure you set up your chart of accounts with this in mind.
Make sure you plan ahead when setting up your chart of accounts. Specifically, your GL accounts should be set up so that “cash” inflows and outflows hit specific accounts and are not mixed with non-cash activity.
Let Us Help You Automate Calculations!
Want us to help you automate these such calculations and simplify reporting for your investors and partners?
Give us a call or book a meeting.