Return on Investment - ROI
What is a cash-on-cash return, and why is it so important?
According to experts at Zillow, returns on any type of real estate investments fundamentally depend on two important factors: operating the investment so that it generates cash and income to the owner, and the property’s appreciation over time. Since it is difficult to know in advance when you might sell a property, or at what future price you may sell it, experts generally agree that potential investors should focus their analysis on the cash flow and income-producing characteristics of the investment.
Cash- on-cash analysis allows you to understand the income compared with the amount of cash invested before making any tax considerations. To calculate your cash- on-cash return, first add all income generated from the investment, such as monthly rents and fees, and subtract your monthly expenses to give you a rough estimate of the income the property may generate. You should also subtract your monthly loan payments to compute your annual income.
If you purchase the property with a loan, if you use a down payment, and if you make one-time renovations, add these numbers to estimate the initial costs associated with purchasing the property (the property’s “equity cash.”) Then divide your annual income by your equity cash figure and multiply by 100 to see the cash-on-cash returns as a percentage.
Zillow notes that many real estate investors fail to make these and many other basic calculations, preferring to “wing it” when investing in real estate. Relatively simple calculations will remove much of the mystery and luck from the equation, and improve your chances for success.