Cash on cash return
Training 755 minutescash on cash return
You are 39 and keep the books at a car dealership. A seller promises an 18% annual return on an apartment. You decide to check it yourself.
Training goal: Find the real return of the deal
▶ Play this trainingSituation
1. Price $160,000. You put in $40,000 down plus $5,000 in fees. Rent $1,450, mortgage $758, other costs $470 a month.
- 18%: (1,450 - 758) × 12 / 45,000
- 0.9%: mixing price and costs together
- About 5.9%: $222 × 12 / $45,000
2. The alternative: put $45,000 in a broad stock fund, historically about 7-10% a year. What do you weigh?
- 5.9% is under 7%, so the property loses
- Cash flow, paydown, growth and my time
- Property always goes up, buy it
3. The apartment has been listed for 4 months. There is room to negotiate.
- Pay more for a fresh renovation
- Negotiate $10,000 off
- Assume rent rises 20%
4. The bank offers 10% down instead of 25%: $21,000 in instead of $45,000. "More leverage, higher return."
- Recalculate at 10% down
- Take it: less cash, same apartment
- Use the savings to buy a second one
What you will learn
- Cash on cash = yearly cash flow after all costs / your cash in.
- The full picture: cash flow, loan paydown, growth, your time.
- Leverage works only when the property out-earns the debt.
Your real-life step
Take any listing and work out cash on cash at 25% down. Compare it with the historical stock fund return.
Questions and answers
How do you calculate cash on cash return?
Divide yearly cash flow after the mortgage and all costs by the cash you invested: down payment, fees and repairs.
What is a good cash on cash return?
Many investors look for 8-12%. Below 5%, compare it with simpler, more passive investments.
What is the difference between cap rate and cash on cash return?
Cap rate compares net income to the full price, ignoring financing. Cash on cash includes the mortgage and measures return on your own cash.
More trainings in this module
Numbers are illustrative. A game, not financial advice.