What is “cash on cash return” and how do we calculate it?
When I first started investing in real estate, allot of people threw around the term, “Cash on Cash” return. I had a vague idea what it was but never knew exactly how they came up with these figures.
It’s actually very simple. It basically is the return you will receive annually on your invested dollars.
As an example…
If you buy a property for $1,000,000 and you put 25% down or $250,000….And the property returns a $25,000 annual return after all expenses are paid…You would have a 10% Cash on Cash return. You are getting 10% annual return on your investment.
The important thing to keep in mind is that this return is calculated after all expenses are pain. So basically it is what you would get send as a distribution. We pay out quarterly to our investors.
Below is a screen capture of deal we have underwritten.
In this example….have a look at the highlighted areas.
1.)This is a 38 unit property purchased for $850,000
2.)This purchase would require $241,000 cash to close and cover the repairs and reserves….
3.)This property would return $21,060 annually to the investor or a “CASH on CASH return of 8.74% annual return.
Now you may be asking yourself….What is the annual rate of return and why does it say that 24.74%….
So, the CASH on CASH does not take into affect the price at the sale of the property and the extra amount the seller will receive upon the sale of the property.
We will discuss in more detail in a later post. But when the property is sold, the investor will also receive a percentage of the equity…
In this case it is 50% and from this, the investor will actually receive more than just their CASH on CASH return to calculate average annual return….in this case, it works out to %24.75 annually.
Give us a call at 510-863-1447 to to find out how to invest in apartment buildings!
Disclaimer: This is just an example of a prior underwriting and is not a guarantee of returns.