One of the most important metrics in evaluating the profitability of a real estate investment is the cash-on-cash return, also known as cash yield or the equity dividend rate. A cash-on-cash return is an annual measure of the cash income generated by a real estate investment in relation to the amount of cash invested. It is a useful and quick metric to gain an accurate picture of the profitability of an investment property, and is often used for efficient comparisons when assessing investment properties.
REAL ESTATE • INVESTMENTS • METRICS
The formula for calculating cash-on-cash return is simple:
Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested
The annual cash flow is the net operating income (NOI) generated by the property, which is the total income generated by the property minus all operating expenses. The total cash invested is the amount of cash you put into the property to purchase it, which includes the down payment, closing costs, and any renovation costs.
Let’s say you purchase a rental property for $300,000, and you put down a 20% down payment of $60,000. You also spend $10,000 on closing costs and $20,000 on renovations, for a total cash investment of $90,000. If the property generates $20,000 in net operating income each year, your cash-on-cash return would be:
Cash-on-Cash Return = $20,000 / $90,000 = 22.2%
This means that for every dollar you invest in the property, you can expect to receive a 22.2% return on your investment in cash flow each year.
There are some important pros and cons to keep in mind when using cash-on-cash return as a metric for evaluating real estate investments:
Advantages:
Disadvantages:
Real estate investors often aim for cash on cash returns that exceed the cost of borrowing funds, such as the mortgage interest rate. This allows them to generate positive cash flow and cover their expenses while also earning a return on their invested capital.
The specific threshold for a good cash on cash return can vary widely, but some investors may consider a cash on cash return of 8% or higher to be satisfactory, while others may target returns of 12% or more.
Here are some tips for using cash-on-cash return effectively in your real estate investment decisions:
Return on investment (ROI) is a metric used to evaluate the profitability of an investment relative to the initial investment. It is calculated by dividing the net profit generated by the investment by the amount of the initial investment. ROI is a simple metric that is widely used to evaluate the profitability of investments across different asset classes.
The internal rate of return (IRR) is a metric used to evaluate the profitability of an investment over time, taking into account the time value of money. The IRR is calculated by discounting the future cash flows generated by the investment back to their present value and comparing it to the initial investment. The IRR takes into account the timing and size of cash flows, making it useful for evaluating investments with complex cash flow structures.
Cash-on-cash return helps assess the return on investment for a specific property, while Net Operating Income (NOI) provides a snapshot of the property’s operating performance and potential profitability. NOI measures a property’s operating income after deducting operating expenses but before deducting debt service (mortgage payments) and income taxes. It represents the property’s ability to generate income from its operations. NOI is calculated by subtracting operating expenses from the property’s total income, and is often used as a basis for determining property value and loan eligibility.
Learn more about real estate and other real assets such as infrastructure and natural resources by downloading our Guide to Real Assets white paper.
Sign up to download our Guide to Investing in Real Assets
Join our impact investor community and be notified of the latest industry news!
*Financial projections or returns displayed on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results.
Disclosures: No communication by Citizen Mint Inc. or any of its affiliates (collectively, “Citizen Mint”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.
Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Citizen Mint believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.
Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Citizen Mint or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.
Sign up now to learn the benefits of private market impact investing for financial advisors
Sign up now to access private market investments on Citizen Mint’s platform.