Calculating Cash on Cash

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:

\$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.

Rehabbing vs. Wholesaling

Many first time real estate investors want to start rehabbing houses but are a little timid about risking their money before they know all the ins and outs of the fix and flip business. Some decide to wholesale first in order to get their feet wet without a large outlay of personal funds or the need to borrow money. This article is written to show new investors why wholesaling can be a viable alternative to rehabbing, as well as be just as profitable.

Yes, there is a lot of profit to be earned on a single fix and flip project compared to one wholesale deal, but one must remember that a typical fix and flip takes 4-6 months to complete, whereas a wholesale deal only takes 30 days. If you look at the difference financially, a five month rehab project on a \$200,000 home may make a profit of \$25,000, but if a wholesaler assigns one property a month and makes \$5,000 per assignment, he or she will also make \$25,000 in the same five months. The difference being that the fix and flip project will take an investment of \$200,000 tied up for five months, and the wholesaling business only requires a \$500 earnest money deposit that is returned at the end of each month.

Another difference is that with a fix and flip, an investor spends the same amount of time making offers on properties with motivated sellers. However, once he has a property under contract, he has to close on it with cash, organize and spearhead the entire rehab process, and then market and sell the property to a retail buyer. Depending on how well he or she designs the rehab, stays in budget and is able to sell the home while the demand is still relatively high will determine whether or not he makes a profit on the project. Whereas, the wholesaler will make a guaranteed profit on each assignment and even if he or she analyzes the rehab poorly or pulls unrealistic comps, the worst scenario is the investor terminates the contract and starts over with no loss of money.

In conclusion, when you are just starting out as a real estate investor, whether you have money to invest or not, wholesaling can be a lucrative way to begin and continue making money in the real estate business.