Cash on Cash Return: Guide to Profits

Cash-on-Cash (CoC) return calculator compares the cash generated by a property to the cash invested, and is commonly used by seasoned real estate investors. In other words, cash on cash return measures how much money you get to keep for every penny you invest in your property. In our opinion, it is useful to project this figure when you're thinking about making a purchase as well as a metric to monitor over time once you've bought a property. Cash on cash return is one of the most important rental property calculators for assessing the health of your investments because your cash is valuable.

You own a condo in Thailand, a breathtaking country as your new home, or for other investment reasons. You've bought this property with a vision. But how do you evaluate whether it's a sound investment? Using cash on cash returns is one of the main real estate calculations to estimate your profits. 

Key Takeaways

• What is Cash-on-Cash Return?
• Calculate Cash on Cash Return
• Why is Cash on Cash Important?
• What is Good Cash on Cash Return?

What is Cash on Cash Return?

Cash on cash return is calculated by dividing the annual pre-tax cash flow from the investment by the total cash invested. It is a good measure of the short-term profitability of an investment. Cash on cash return is a financial metric that is used to measure the profitability of a real estate investment. It is calculated by dividing the annual pre-tax cash flow from the investment by the total cash invested in the property, and expressing the result as a percentage.

To further understand how this correlates with rental yield, learn how to calculate rental yield outcome here. Stay with us to explore how leveraging this calculation can redefine your investment portfolio.

Calculate Cash on Cash Return

Real estate investors need to calculate their cash on cash returns to understand how well their investment performed in relation to the amount of cash they invested. Let's explore how to calculate this metric in detail:

What are Important Variables for Cash-on Cash Returns?

Understanding the expenses needed to calculate cash on cash returns is vital. Key variables include:

• Monthly Rental Income: The total revenue generated from your property each month. Income includes rent and additional fees such as pet deposits or laundry charges.
• Operating Expenses: Monthly fixed-cost with your property, such as maintenance, management fees, property taxes, insurance, and utilities.
• Loan Payments: If you apply for a home mortgage.
• Down Payment: The upfront payment made to secure the property, typically expressed as a percentage of the purchase price.
• Closing Costs: Expenses incurred during the property purchase process, such as legal fees, inspection costs, and lender fees.
• Renovation and Repair Costs: Any initial payment and cost required to prepare the property for tenants or improve its condition.
• Annual Pre-Tax Cash Flow: The total income from the property over a year, after accounting for operating expenses but before taxes.
• Total Cash Investment: The cumulative sum of all cash outlays, including the down payment, closing costs, renovation expenses, and other upfront costs.
• Cash Flow Timeline: Consideration of the consistency and predictability of cash flow, which can impact the overall return.

How to Calculate Cash On Cash Return Example

Calculating cash on cash return is a systematic process that involves several specific steps. Let us walk through the process with a real-world example:

1. Calculate Your Monthly Cash Flow: Begin by considering all sources of income, such as rent, pet deposits, or additional fees, and subtracting your total expenses, which may include mortgage payments. Suppose you earn $2,000 (฿67,580) per month in rent and pay $1,600 (฿54,064) in expenses, leaving a net cash flow of $400 (฿13,516) each month.

2.  Convert to Annual Cash Flow: Multiply your monthly cash flow by 12 to determine the annual cash flow. Using the example above, your annual cash flow would be $4,800 (฿162,960) ($400 per month x 12 months).

3.  Add Up Your Initial Cash Investments: Include all the cash expenditures you made when acquiring the property, such as the down payment, closing costs, and necessary repairs or improvements. Assume you purchased a rental property for $250,000 (฿8,447,500), made a 25% down payment of $62,500 (฿2,115,625), incurred $7,000 (฿236,930) in closing costs, and spent $3,500 (฿118,465) on initial repairs. Your total initial cash outlay would be $73,000 (฿2,471,020).

4. Divide Your Annual Cash Flow by Your Initial Cash Investment: This step involves dividing your annual cash flow by your initial cash investment to calculate the cash on cash return. From our example, you would divide $4,800 (฿162,960) by $73,000 (฿2,471,020), resulting in approximately 0.0658.

5. Multiply the Resulting Fraction by 100%: To make the figure more accessible, convert the decimal into a percentage by multiplying it by 100%. In our case, the cash on cash return would be 6.58% (0.0658 x 100%).
6. Analyze Your Results: Reflecting on the calculation, a 6.58% return signifies that within a year, you will have earned back slightly over 6 percent of the initial cash investment of $73,000 (฿2,471,020).

Why is Cash on Cash Formula Important?

Cash on cash calculation is for you who are looking into real estate as investments purposes.   As a condo owner, it's important to anticipate that the rental income will exceed the mortgage payments, ensuring consistent monthly returns. This strategy enables ownership of high-value condominium assets with a relatively modest initial investment. This approach holds significant weight in assessing both present and future investment returns, especially in the context of purchasing a condo for sale in Thailand.

Down below are few reasons on how understanding to use cash on cash formula is important for your property investment journey. 

• Quick Mortgage Assessment: Cash-on-cash return helps you know if your condo can cover its mortgage costs. By comparing the yearly income to your total investment. You can predict the income you'll get back relative to what you've put in. 
• Smart Investment Choices:  Cash-on-cash formula considers both income and costs. This tool provides precise investment return information, thereby facilitating well-informed and strategic financial decisions.
• Planning for the Long Run: The formula isn't just about the initial purchase. When evaluating your investment strategy, the tool takes into account all expenses, including maintenance. Align investments with goals and risk tolerance for better returns. 

What is a Good Cash on Cash Return?

A good cash-on-cash return varies depending on the country. As it is influenced by factors such as interest rates, economic stability, regulatory environment, and local real estate market dynamics.
Determining a "good" cash-on-cash return in real estate investment is a nuanced concept. It factors into your own investment strategies. 

Down below we have a few examples on how to calculate a good cash on cash returns for properties in Thailand. 

Phuket House: Banyan Tree Grand Residence (125M baht)

• Assuming a monthly net cash flow of 500,000 baht (after expenses):
• Annual Cash Flow: 500,000 baht * 12 months = 6,000,000 baht
• Annual Cash Flow: 500,000 baht * 12 months = 6,000,000 baht
• Cash on Cash Return: (6,000,000 / 125,000,000) * 100% = 4.8%

 

Bangkok Condo: The Lakes (66M baht)

 

• Assuming a monthly net cash flow of 300,000 baht (after expenses):
• Annual Cash Flow: 300,000 baht * 12 months = 3,600,000 baht
• Initial Cash Investment: 66M baht
• Cash on Cash Return: (3,600,000 / 66,000,000) * 100% = 5.45%

The Lakes Condo Bangkok

From this comparison, Bangkok condo offers slightly higher cash on cash return at 5.45% compared to the Phuket House at 4.8%. For those in the exploratory stage, undecided on whether to invest in a house or a condo, recognizing the nuances between these property types becomes paramount. Delving into the distinctive merits and considerations of houses and condos offers valuable insights that resonate with your investment aspirations and lifestyle inclinations. Learn more about the differences between a house and a condo to make an informed decision that best suits your needs.

Using Cash on Cash for the Down Payment

Cash-on-cash return serves as a critical instrument, in orchestrating the down payment on a property. This metric explains the prompt returns relative to the investment, enabling investors to formulate discerning strategies for impending acquisitions.

How Cash on Cash Helps with Down Payment:

• Immediate Insight: This measure provides a snapshot of how quickly the initial investment is being recouped, enabling planning for future down payments.
• Sustainable Cash Flow: A favorable Cash on Cash Return signifies a reliable income stream, potentially used for a down payment on a new property.
• Strategic Timing: Monitoring cash on cash returns aids in aligning down payments with existing investment cash flow, and optimizing investment strategy.

In Summary 

You are considering real estate investment for rental income, employing the Cash-on-Cash Return formula stands out as the most reliable and pragmatic approach. This method comprehensively factors in nearly all investment variables, including money, installments, down payments, and more. Whether you're making an investment decision or receiving investment proposals, it's advisable to utilize this formula to determine the most favorable course of action.

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