Using Cash on Cash Return to Invest Smarter

When it comes to commercial real estate investing, cash-on-cash return is one of the most important metrics that you need to understand. This term refers to the annual percentage of cash flow that you receive from a property compared to the amount of cash that you have invested in it. In this article, we will discuss what cash-on-cash return is and how to calculate it, examples of properties with high cash-on-cash return and how you can find such investment opportunities. We will also provide examples of how this metric can be used to make smart investment decisions. 

What Is Cash-on-Cash Return?

Cash-on-cash return is a metric that measures the annual cash flow from a property compared to the amount of cash that you have invested in it. This ratio is used to assess the profitability of an investment and to compare different investments. It’s a favorite metric of commercial real estate investors because it allows you to quickly and easily see how much cash flow you are actually receiving from a property.

What Is the Formula for Calculating Cash-on-Cash Return?

The formula is fairly simple. You simply take the annual cash flow from a property and divide it with the amount of cash that you have invested in it. This will give you the percentage of cash flow that you are receiving on your investment. 

Cash-on-cash Return = Annual Pre-Tax Cash Flow/Total Cash Invested 

Where: 

Annual Pre-Tax Cash Flow = (GSR + OI)–(V + OE + AMP) 

GSR = Gross scheduled rent 

OI = Other income 

V = Vacancy 

OE = Operating expenses 

AMP = Annual mortgage payments 

How To Use This Information to Make Better Investment Decisions

This metric is important because it allows CRE investors to see how much they are actually making from their investment. It also helps to compare unique properties and make investment decisions based on which one will generate the highest return. Additionally, it can be used as a tool to negotiate better deals with sellers. 

For example, let’s say that you are looking at two properties that are both generating a cash-on-cash return of 12%. However, the property that you are interested in purchasing has a lower asking price than the other one. Here, you could use the metric to negotiate a lower purchase price for the property. 

This metric is important because cash flow is king in commercial real estate investing. 

An investor could purchase a property for $1,000,000 and it could appreciate in value by 20% over the course of a year, but if that same property only generates $120,000 in cash flow, then the investment might not be worth it. 

The cash-on-cash return allows investors to see which properties are actually generating positive cash flow and which ones are not. 

Factors That Can Affect Your Cash-on-Cash Return

There are a few factors that can affect your cash-on-cash return. The first is the amount of cash invested in the property. The more money that you put down, the higher this return will be. 

Another factor is the interest rate on your loan. If you are paying a higher interest rate, then your annual cash flow will be lower and your cash-on-cash return will be lower as well. 

Another factor is the appreciation of the property. If the property appreciates in value, then you will make more money when you sell it and your overall return on investment (ROI) will be higher. However, cash-on-cash return only considers the cash flow that you are receiving from the property and does not factor in appreciation. 

The vacancy rate of the property is also a big factor to consider. A higher vacancy rate means that there will be periods of time when the property is not generating rental income, which will lower your cash-on-cash return. 

The final factor is the operating expenses of the property. If the property has a lot of operating expenses, then it will eat into your cash flow and lower your cash-on-cash return. 

The Benefits of Investing in Property with High Cash-on-Cash Return

There are a few benefits of investing in property with a high cash-on-cash return. The first is that you will generate a good amount of cash flow from the property. This cash flow can be used to pay down debt, make repairs or improvements to the property, or even reinvest into other properties. 

Another benefit of investing in properties with high cash-on-cash returns is that it will be easier to get financing for future investments. Lenders like to see that you have experience investing in commercial real estate and that you are generating positive cash flow from your investments. If you have a track record of investing in properties with high cash-on-cash returns, then it will be easier to get approved for loans in the future. 

Investing in a property with high cash-on-cash return is a good way to hedge against inflation. As the cost of living goes up, the rent that you can charge will also go up. This will allow you to keep up with the rising cost of living and maintain your standard of living. 

Investing in real estate is a great way to build wealth and generate passive income. However, it is important to focus on investments that will generate a high cash-on-cash return. By doing this, you will maximize your cash flow and reach your financial goals sooner. Cash-on-cash return is one of the most important metrics to look at when considering any commercial real estate investment. 

Examples of commercial properties with a high cash-on-cash return

Industrial

The industrial sector has been the best-performing real estate sector over the past several years. Industrial properties have seen strong demand as companies move their operations closer to major metropolitan areas. 

The industrial sector is also benefiting from the shift toward e-commerce, which is increasing the need for more warehouses and distribution facilities. Many companies are looking to expand their operations, and they need more space. This has led to increased demand for industrial properties in many markets across the country Industrial real estate is used to store goods, manufacture products, and provide other services. Demand for industrial space has been increasing as companies have expanded their operations and increased their need for storage space. Industrial properties are considered to be very stable investments because they are less subject to fluctuations in the economy than other types of commercial real estate such as office buildings or retail stores. 

Multifamily housing

Multifamily housing is a type of residential property that has multiple units. It can be apartments, townhouses, or other types of homes where more than one family lives together. Multifamily homes are often found in urban areas, where large numbers of people live in close proximity to each other. Multifamily housing is one of the most stable types of real estate investments. The passive nature of income from apartments, their appreciation in value, and the host of tax incentives that come with owning them make them a prime investment opportunity.

Multifamily properties are also relatively low maintenance compared to other types of commercial property, which means that investors can spend less time and money on managing their investment properties than they would if they owned office buildings or shopping centers. Multifamily properties are generally easier to finance than single-family homes. The financing of a multifamily property is often based on the income it generates, so it’s easier to find lenders willing to provide you with a loan. Multifamily properties may also be eligible for tax breaks that aren’t available for single-family homes.

How To Find Properties with High Cash-On-Cash Returns

There are a few ways to find properties with a high cash-on-cash return. The first is to look for properties that are being sold below market value. This could be because the property is in need of repairs or it is located in an area that is not in high demand. By finding these types of properties, you will be able to get a good deal and generate a high cash-on-cash return. 

Another way to find properties with high cash-on-cash returns is to look for Class C and D properties in up-and-coming neighborhoods. These types of properties are often overlooked by investors, but they can actually be great deals. By investing in these types of properties and fixing them up, you can generate a high cash-on-cash return. 

You can also find high cash-on-cash return properties by looking for properties in areas with high population growth. This is because as the population grows, there will be more people looking for rental units. This increased demand will allow you to charge higher rent and generate a higher return on your investment. 

Finally, you can also look for properties that are being foreclosed on. These types of properties are often sold at a discount, which means that you can generate a high cash-on-cash return if you are able to purchase the property and make the necessary repairs or renovations. 

Investing in a property with a high cash-on-cash return is a great way to build wealth and generate passive income. By focusing on investments that will generate high cash-on-cash returns, you will be able to maximize your cash flow and reach your financial goals sooner.  

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October 10, 2022

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