Do you know what is cash on cash return (COCR) and how to calculate it? Read on as we explain how this formula plays a big part in your rental property investments.
Plain English Definition: It is the amount of profit that rental property is earning (before taxes) vs the total amount that you paid for it upfront. It is expressed as a percentage. A higher percentage is desirable since it means that rental property is generating more profits for every dollar you invested in it.
While rental yield remains as the most popular method to gauge the profitability of a rental property, many experienced investors (including Robert Kiyosaki of the Rich Dad, Poor Dad fame) favor cash return.
Cash on Cash Return = [Annual Cash Flow (before taxes) / Total Cash Invested] x 100%
Annual cash flow is your total rental profits (rental income - rental expenses)
Total cash invested is the total amount of money that you paid upfront for the rental property. This includes the down payment, closing fees and renovation costs.
Next up we will show you how to calculate this formula with the example below:
Annual Rental Income
A return of 19.4% means that you're earning back 19.4% of your initial investment every year.
Now to answer the big question that we get asked a lot: "What is a good return?"
This is a very general question... you'll probably get 10 different answers if you asked 10 different investors. However, almost everyone will agree that a return of 20% of higher is considered good for a rental property. And now that mortgage lenders are asking for more down payment, a growing number of investors are deeming a 10% return as acceptable to good.
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