Knowing what you are earning on an investment is important in order to determine if you are making money or losing money. Understanding the type of investment you have is also vital. Knowing what is going on with an investment helps you make better financial decisions.
There are many ways to calculate investments. In this article we will concentrate on determining the Cash-on-Cash that an investment property will produce. What is Cash-on-Cash? Cash-on-Cash is the amount of return we make on an investment, usually our down payment. We take the money we have put in to the investment and calculate the amount of return we receive on our cash. As mentioned above, we will use the Cash-on-Cash method when using a mortgage to buy a property. What we are going to do is calculate our rate of return on our down payment, rehab or both. Let’s look and see what kind of money we are making on a deal.
The house we are going to purchase will be sold to us for $200,000. We will put $50,000 down which is 25% of the purchase price. We get a loan for $150,000 at a rate of 3.8%. Our payment will be $699 per month. The rents on the house are $1,300 per month. In addition, the following expenses must be accounted for. A property manager will typically cost 10% of the gross rents, but we are going to manage the property ourselves because it is local and this will increase our rate of return. Vacancy will be 5% of the gross rents. Maintenance and upkeep will be $50 per month or $600 for the year. In addition, the property taxes are $775 per year. The homeowner’s insurance will cost $400 per year.
Let’s see what all of this looks like:
Rents $15,600 per year
Less Vacancy $780 per year
Less Mortgage $8,388 per year
Less Property Taxes $775 per year
Less Insurance $400 per year
Less Maintenance $600 per year
Net Income $4,657 per year
Now, we are going to determine the Cash-on-Cash return we will be making with this property. We determine this by calculating the following:
$50,000 your down payment
$4,657 net income the property produced
To determine our rate of return on investment we would do the following:
4,657/50,000 is 9.3%
This 9.3% is the rate you have earned on your $50,000 down payment. Before you decide if you are going to buy a property, you can determine if your Cash-on-Cash return is something you would be happy to have. Remember, Cash-on-Cash is determined if you are financing a property. If you pay cash for a property, there will be another way to determine your investment rate. That will be talked about another time.