post

How to Calculate Cash on Cash Returns – Day 6

How do you calculate cash on cash returns?   It’s a great question, and one I’m happy to try and shed some light on.  There is some text and calculations below the video:

Why is a cash on cash return calculated?

Determining a CCR is simply a tool. Please don’t let it be the “end-all, be-all” factor in looking at your real estate investments.  But sometimes, it just plain makes “cents”. 🙂

Other factors could be:  equity positions behind your investment or whether the property is located in a great area.

What in the world do I mean by saying “equity positions behind your investment”?  That’s a GREAT question…I’ll answer it further down.  Anyway…watch this video.


How do you calculate a cash on cash return (for real estate investing)?

CCR = (Income in 1 Year/Investment) X 100

CCR = Cash on Cash Return

Income in 1 year…what is your net income?

Investment…How much you put into purchase/repairs for the property

Example:

A Duplex yields $8,000 of net cash (before taxes, etc) and needed no repairs.  Suppose you paid $50,000 for the property.

Your CCR would be $8,000/$50,000 X 100 = 16% CCR

Oh, one more thing…about that Equity behind your Investment thing I mentioned above.

But, in this case…if you are counting equity…it’s not really your ROI…your total return on investment.  What if the property took $50,000 to buy and needed NO REPAIRS…but was actually worth $80,000??  While  your cash on cash return would be 16%, your ROI would actually be the $8,000 in cash plus the $30K in equity.

  This results in a before tax ROI of 76% for the FIRST year !!!

Now, here’s a key component to this…your ROI will actually decrease yearly after that. Hmmmm….How you ask?

Well, after 2 years, you’ve received a return of $30,000 (equity) + $16,000 (cash from 2 years of income).  In this case $46,000/$50,000/2 years = a 46% ROI over 2 years.  Do you see how that works?

This is why I like to use a lease with an option to purchase strategy for most of my single family home rentals.  Buy with equity and cashflow, and keep your capital working for you.  Very important…IF you’re into generating more cash, faster.  If you’re simply looking for a consistent, recurring revenue stream without the hassles of buying and reselling property…then stick with a straight rental.

Hope this video helps.  Have any questions or comments, please let me know below.

Thanks,

Brandon

PS.  In case you’re keeping track, or joining me for the first time…this is Day #6 of my 30 Day Personal Challenge.  So far, so good. 😉

Also, if you found this video helpful, you might also enjoy the one from yesterday about calculating monthly interest only payments.

Comment with Facebook

comments

Speak Your Mind

*