But other investors won’t invest without at least a 20% cash-on-cash return. Most experts think that a good cash-on-cash return is 8-12%. For example, let’s say that you make $5,000 off of the property each year and you made an original down payment of $40,000. Your cash-on-cash return is your annual cash returns divided by your down payment. But $1 isn’t much of a profit.Ī cash-on-cash return is an easy way to estimate how good of a cash return the property will give you. If you’re losing money each month, how are you supposed to make a profit? Cash-on-Cash ReturnĪ positive cash flow isn’t an automatic, “Yes! You made a great investment!” Having expenses of $1,999 a month and receiving rent of $2,000 a month is technically a positive cash flow. If you charge less than your monthly expenses for rent, you’ll have a negative cash flow. $2,500 monthly expenses – $2,700 rent = $200 positive cash flow Calculating cash flow is as easy as subtraction: You’ll need to use this as a basis for how much to charge as rent. For example, if your mortgage rate is $2,300 a month and you have other rental expenses totaling $200 a month, your monthly expenses will equal $2,500 a month. The idea of positive cash flow is pretty simple: charge a rent higher than your monthly mortgage rate and other expenses. But what are they and how do you calculate them? Positive Cash Flowįocusing on obtaining a positive cash flow will help you actually make a profit off of your investment. If either of these garner bad results, the entire investment will be a flop. Enter: positive cash flow and cash-on-cash return.
While it’s important to consider every variable, there are a few simple formulas that will guarantee you’re not making a terrible investment. If you’re thinking about investing in real estate, there’s a lot of things to keep in mind.
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