In today’s video we are continuing our sequence on one of the most important concepts in real estate investing for beginners – cash on cash return.
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In our first video, we covered what is cash on cash return in real estate. You can watch here: https://www.youtube.com/watch?v=jSxXifiOync.
Today we are focusing on how to calculate cash on cash return in real estate to make profitable investment decisions every time.
Cash on cash return in rental property investing is the ratio between the annual net operating income and the total cash investment.
The annual net operating income, or the annual cash flow before tax, is calculated by subtracting all your rental expenses from your annual rental income.
You can calculate the annual rental income by multiplying your monthly rental income by twelve for the number of months in a year.
The rental expenses, or operating expenses, include utilities, insurance, property management, maintenance, and others.
After you have calculated your annual cash flow before tax, you have to divide it by the total cash investment that you made to get the cash on cash return of your rental property.
As you can imagine, your calculations will be significantly different depending on your financing method: cash vs. mortgage. We will discuss the differences between these two cases in our next video.
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