Cash on cash return is a critical metric for real estate investors when evaluating rental income properties. This measurement focuses on the cash income earned on the actual cash invested, helping investors understand how effectively their money is working for them. But what is good cash on cash return? And why is it an essential component of rental property assessment? Understanding its benefits can provide clarity and direction for property investors.
The Importance of Cash on Cash Return in Rental Property Evaluation
Real estate investments involve significant financial decision-making, and cash on cash return simplifies this complexity. It does so by offering a clear view of how cash flows relative to the cash actually invested, making real estate returns easier to compare with different types of ventures. The primary significance of cash on cash return lies in its ability to create a tangible connection between investment and immediate returns, especially for rental income properties.
Cash on cash return helps to identify whether a rental property is meeting financial expectations and targets. For instance, if an investor spends $50,000 out-of-pocket on a property and earns $5,000 annually in net cash flow from it, their cash on cash return can be calculated as 10%. This makes it easier to set realistic benchmarks and gauge potential profitability.
What is Considered a Good Cash on Cash Return?
The ideal cash on cash return varies depending on individual investment goals, risk tolerance, and local market conditions. However, many successful investors aim for a cash on cash return within the range of 8% to 12%. Higher returns often mean a more lucrative property, though properties with lower risk may justify slightly lower percentages. The key here is balance. A “good” cash on cash return is relative and should align with both short-term cash flow objectives and long-term investment strategies.
For markets with higher rental demand and increasing property values, slightly lower returns may still be acceptable due to anticipated equity growth. Alternatively, high initial cash on cash returns might result from regions with lower acquisition costs, helping offset other risks like maintenance or vacancy.
Why Cash on Cash Return Is Beneficial for Rental Investors
While various metrics evaluate property performance, cash on cash return provides unique advantages for decision-making in the rental market.
- Simple Calculation and Application
Cash on cash return is easy to calculate, making it a go-to metric for both seasoned investors and newcomers. Since its formula only considers cash expenditures and returns, it eliminates some of the uncertainties associated with more complex projections or accounting techniques.
- Tailored to Individual Investment Strategies
Investors with different goals can use cash on cash return to assess properties based on their specific financial expectations. Some might prioritize properties with quick returns, while others focus on equity growth. This flexibility ensures that cash on cash return aligns perfectly with individual strategies.
- Immediate Evaluation of Profitability
Cash on cash return emphasizes the immediate, real-world performance of a property. It focuses on what matters most in the short term for most investors, making it a preferred choice for those who rely on cash flow as a central component of their investment.
- Supports Better Comparison Between Properties
Decisions about where to invest often come down to a comparison of multiple properties. Cash on cash return simplifies this process, enabling investors to easily identify the most lucrative options without needing intricate models or overly detailed projections.
