For investors that aren’t already familiar with Real Estate Syndications, it involves multiple investors pooling their capital together to purchase no-hassle, hands-off investment properties that deliver passive income and appreciation to the investor. For additional details on real estate syndications, we recommend checking out the following blog posts:
One of the keys to selecting a great real estate syndication investment is performing due diligence and detailed analysis on the Sponsor, Market, and the Property. Our team here at Limitless Investing independently reviews every syndication opportunity prior to sharing with our investors to ensure they are only receiving high-quality, pre-vetted opportunities.
With that said, we believe it is important for investors to understand the Essential Real Estate Calculations that are utilized as part of this analysis. In previous posts we reviewed Net Operating Income (NOI), Cap Rate, Internal Rate of Return (IRR), Equity Multiple and Average Annual Return (AAR). Today we will be exploring the sixth calculation: Cash-on-Cash Return.
What is Cash-on-Cash Return?
A Cash-on-Cash Return is a rate of return metric that calculates the income earned on the cash invested in a property. The calculation is typically utilized to express the return on a one year basis, rather than for the life of the investment.
A Cash-on-Cash Return is normally used to measure commercial real estate investment performance. It is sometimes referred to as the cash yield on a property investment.
Why is Cash-on-Cash Return important?
Cash-on-Cash Return is a common metric used in real estate analysis as it allows the investor to calculate the return while taking into account the leverage (mortgage debt) on the property. This is key as the vast majority of real estate investments utilize leverage when the property is purchased.
Calculations based on standard Return on Investment (ROI) take into account the total return on an investment. Alternatively, Cash-on-Cash Return, strictly measures the return on the actual cash invested, providing a more accurate analysis of the investment's performance.
How do I calculate Cash-on-Cash Return?
The calculation for Cash-on-Cash Return is relatively simple:
Cash-on-Cash Return = Annual Cash Flow / Total Cash Capital
For example, let’s say you invest in a real estate syndication that provides with the following investment profile:
$50,000 initial investment
7% cash flow per year from rental income ($3,500 per year)
Property sells in year 3 for double the original investment (original $50,000 + $50,000 profit)
Using the formula we can easily calculate the Cash-on-Cash Return for each year:
Year 1 Cash-on-Cash Return = 7% ($3,500 / $50,000)
Year 2 Cash-on-Cash Return = 7% ($3,500 / $50,000)
Year 3 Cash-on-Cash Return = 107% ($53,500 / $50,000)
Conclusion
You are now armed with one of the most essential real estate calculations. If you’d like to explore how no-hassle, hands-off real estate syndications can offer attractive Cash-on-Cash Return, don’t hesitate to reach out to discuss your investing goals and subscribe to our blog for future content!
If you’re interested in learning more about investing in a real estate syndication, download your free copy of our eBook, Achieving Financial Freedom by Investing in No-Hassle, Hands-Off Real Estate
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