Cash-on-Cash Returns

investing-cash-on-cash-41.jpg

Cash-on-Cash Returns

Passive investors in crowdfunded real estate transactions may not be familiar with some of the various ways that return on investment can be calculated in the real estate world. Here we explore one of the most common measures, the “cash-on-cash” return.

Cash-on-cash (sometimes called the equity dividend rate) is one of the most common return formats used in the real estate industry. It is a ratio (usually converted to a percentage) that is derived by dividing cash flow (before tax) by the amount of equity initially invested.

The cash flow figure equals the net operating income of the property – the gross rental income less the usual operating expenses – minus the debt service on any mortgages to which the property is (or will be) subject. That number is then divided by the equity investment in order to get a measure of the “return on equity,” or cash-on-cash return. A simple example might be as follows:

Effective gross income $180,000
Less: operating expenses ($70,000)
Net operating income $110,000
Total investment (all-cash) $1,000,000

Cash-on-cash return: $110,000 or 11.0% of $1,000,000

The cash-on-cash figure doesn’t take into account any income tax effects, resale implications (including changes in property value), future cash flows, or reductions in loan principal. It does, however, give a good feel for the immediate and ongoing periodic return that a cash flow investor can expect.

The cash-on-cash figure can also show the effects of leverage – using a mortgage loan to finance part of the property’s purchase price. Let’s assume now that in the above example $800,000 of the total purchase price is financed by a mortgage loan – so that the investor is only paying $200,000 cash for the same property. Although this will result in debt repayment expenses (interest and, oftentimes, principal amortization), the much lesser equity investment required often makes this additional expense worthwhile. Let’s look at the same property with leverage in place, assuming an 8% interest-only loan:

Net operating income $110,000
Less: debt service (8%) ($64,000)
Net cash flow $46,000

Cash-on-cash return: $46,000 or 23.0% of $200,000

Our cash-on-cash return would thus more than double if this mortgage loan were to be used to finance the greater part of the property’s purchase price. Loans bring with them risks, of course – any decrease in the property’s projected net operating income will be borne entirely by the owner, since the bank must be paid back in any event. Yet this cash-on-cash return analysis shows how leverage can also greatly increase the return on equity, and thus the proportionate cash flow returns to the investor, if the interest rate on the loan offers favorable financial leverage to the person making the equity investment.

There are other measures that may be needed to decide whether an investment should be purchased; investors need to consider income taxes, riskiness, whether more or less money should be borrowed, and possible alternative means of financing. A potential real estate investment requires a sophisticated level of in-depth analysis. The cash-on-cash return measure remains a basic and important yardstick, however, in indicating whether an investment might be a good one.

JOIN REALTYMOGUL
Create an account or sign in.
Are you an Accredited Investor?
Must be 8 characters or more with an uppercase and lowercase character, a number, and a symbol.
By clicking "JOIN REALTYMOGUL" you are agreeing to our Terms of Service and Privacy Policy, and that you've had an opportunity to review RM Securities, LLC's Form Customer Relationship Summary.
SIGN IN
Don't have an account yet? Join RealtyMogul.
Forgot Password?
Questions? Our Investor Relations team is available to help 9 AM - 8 PM ET Monday to Friday. Contact us at (877) 977-2776.
Forgot Password
Enter your email address to receive a code to reset your password.
Enter the code sent to your email address below and your new password.

Resend Code

WELCOME
Welcome,

Welcome to RealtyMogul! We need to ask a few additional questions to get to know you.

Your Net Worth
Are you interested in 1031 exchanges?
Thank you!

We’ve received your information and updated your Investor Profile.

Welcome to RealtyMogul

As part of RealtyMogul's commitment to transparency, we want to inform you that you have been directed to our website from an unaffiliated third-party marketing company who is compensated up to $250 for each investor who registers on our site. RealtyMogul and its affiliates have no relationship with the marketing company other than this compensation arrangement. RealtyMogul and its affiliates are not responsible for the preparation or accuracy of, and do not explicitly or implicitly adopt or endorse, any content provided by the unaffiliated marketing company.

SECURITY SETUP

Secure Your Account

Add a layer of protection to your RealtyMogul account. Set up two-factor authentication below.

Select your preferred method of two-factor authentication to continue:

Set Up SMS Verification

Receive a one-time code via text message to verify your identity when you log in.

Use an Authenticator App

Use an authenticator app on your device to verify your identity when you log in.

Remind me later
SECURITY SETUP

Security setup is complete.

You can manage your two-factor authentication settings anytime in your profile.

SECURITY SETUP

Verify your phone number.

We've sent a text message with a one-time verification code to:

Request another code.

SECURITY SETUP

Verify your phone number.

Request a one-time verification code to verify the phone number we'll use for two-factor authentication.

US phone number only. Message and data rates may apply.

SECURITY SETUP

Connect your authenticator app.

1. Install an authenticator app

of your choice on your mobile device.

2. Scan this QR code

with your authenticator app to get a verification code.

QR Code

3. Enter the code

from your authenticator app:

SIGN IN

Verify your identity.

REPLACE ME

Request another code.

SECURITY SETUP

Security setup skipped.

You can manage your two-factor authentication settings anytime in your profile.