Encourage and MotivationĬash-on-Cash return provides a good amount of encouragement and motivation. How does that change your return? One way to assess these different scenarios is by using cash on cash return and that might help you determine how much leverage to use. But what if you used leverage instead by taking out a loan and putting down 30%. You can use it to evaluate an investment after changing certain factors like how much you leverage the property.įor example, if you paid all cash for a certain property and you received a certain amount, you might receive an 8% return. See How Changing Certain Factors Could Affect Your Returns As a preliminary comparison tool, it’s hard to beat. If you have an average of what an investment might yield, as well as how much you may want to invest, the CoC calculation can quickly help you see the investments with the highest return potential. You can also use CoC to compare investments quickly. You simply put a certain amount in and you get a certain percentage return back in your pocket. While metrics like Internal Rate of Return can be quite confusing, people can wrap their heads around this calculation much more easily. The greatest strength of the cash-on-cash calculation lies in its simplicity. Net Operating Income = Revenue (Rent + Other Income) – Expensesĭebt Service = Mortgage Payment (Principal + Interest) Strengths of Cash-on-Cash Return Simplicity When looking at a rental property it might look something like this: So for example, let’s say you put $10,000 into a real estate crowdfunding deal (Total Cash Invested) and you receive $1000 over the course of the year (Annual Before Tax Cash Flow). You take the amount you receive (in cash) from your investment and divide by the total amount you invested. Like most real estate calculations, it’s pretty simple. How Do You Calculate Cash-on-Cash Return? The cash-on-cash return, specifically, is one of the simplest and most effective ways of calculating the return an investment will likely yield. They’re integral to understanding the various investments we come across in crowdfunding, syndications, funds, and rental real estate. It’s always tricky figuring out how to best evaluate an opportunity, so I thought it might be important to discuss and explore key terms like this. Though we talked about many potential ways to evaluate investments, one interesting thread of the discussion was based around cash-on-cash (CoC) returns vs internal rates of return (IRR). Someone posted in on our Facebook group, Passive Income Docs, recently about the desire for a certain return on investment (ROI). What’s the best way to evaluate an investment?
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