Although it is well known that investing in real estate is a profitable and low-risk business, it is also true that not all real estate is equally profitable, or that the fact of having bought a property is synonymous with obtaining high liquid income.
Alternative investments such as real estate are characterized by potential liquidity and low (and even negative) correlation with the markets, which means that real estate tends to rise when stocks fall. However, real estate may also require more attention from the investor to get the most out of their assets.
Do you want your money to work just as hard for you as you did for it? If that’s the case, you should consider increasing your cash-on-cash return on your real estate property investments—this is a commonly used metric in the real estate sector. Agents use it to determine the profitability of property investments. It correctly analyzes how much money the investor has to invest into the venture in the first place.
You usually want to see a strong return on your investment if you own one or more properties. If you don’t, it’s better to sell it.
However, calculating a rental property’s return on investment (ROI) does not provide the complete picture. You should perhaps calculate your cash-on-cash return (CCR).
Cash on Cash Return Definition
Let’s start by defining what this term signifies. You’ve probably heard of the term “return on investment.” Your CCR is very similar to that. It does use the money you put into the contract personally rather than using the transaction’s total value.
According to Investopedia, your CCR, also known as the equity dividend return, is computed slightly differently. Standard ROI calculations take into consideration the whole ROI. While the cash-on-cash return solely considers the return on the money invested, giving a truer picture of the investment situation.
Net Operating Income/Total Cash Investment = Cash on Cash Return (CCR)
The net amount of rent you get subtracted by the expenses such as building upkeep, utility bills, and property taxes is referred to as your net operating income. Please note that all of this is based on income before taxes. Calculating your CCR might assist you in figuring out if you need to make improvements to your property to enhance your CCR. Let’s start with a simple example to demonstrate how CCR is calculated.
Cash-on-Cash Return Calculation
Here’s a simple example showing you how CCR is calculated.
You paid $200,000 for a home (assuming closing costs are included). You then paid $100,000 on upgrades, bringing your total investment to $300,000.
Net Operating Income/$300,000 = Cash on Cash Return
You find some fantastic renters and charge them $10,000 per month. You’ll earn $120,000 in 12 months, without taxes and expenditures. Let’s imagine your total costs for the year are $10,000. So, you made $110,000 in net operating income.
CCR = $110,000/$300,000
Here’s what you’ve got:
$110,000/$300,000 = 36 percent
This is a simplified scenario based on the assumption that you paid cash for your home and any modifications. You’d have to evaluate the initial mortgage cost, the outstanding amount, and the mortgage rate if you took out a mortgage. You’d also have to think about the current state of the property and its future value.
How to Improve Your Cash on Cash Return
Unfortunately, experts disagree on what constitutes a good CCR. Many argue it’s 8%, while others insist on a minimum of 20%. If you’re not happy with your current CCR, regardless of the number, below are some strategies you can implement to improve it.
Long-term rental: This is, perhaps, the most traditional method to obtain income from real estate ownership, it is a classic that will never go out of style because it is practically a proven formula. In addition, it is an excellent way to obtain cash flow through a fixed monthly income that allows you to carry out small financial operations.
Although the purchase of real estate for long-term rentals has many benefits, one drawback is the total time it will take to return the total investment, which can last for years. However, once this happens, the income generated can be for life (literally) and increase as capital gains allow.
Adequate maintenance of the property: All property, land, house, or apartment requires care and proper maintenance. Not doing so implies risking its value and reducing the possibility of renting it at a good price. Maintenance must be carried out periodically to keep it in optimal conditions and attractive to potential tenants or buyers. Otherwise, it is very likely a detriment to the property’s profitability.
Remodel/Redecorate: Tell me what you look like, and I’ll tell you who you are and how much you cost; that’s what happens with real estate. The more attractive the property is, the more people will be interested in it. It’s about “making it visible” in front of the right eyes to achieve the stated objective, either rent it or resell it.
Although the purchase or rental value is primarily determined by its location, the property can also be more appreciated for internal improvements related to its appearance and functionality. Improved distribution of spaces, a swimming pool, an attractive interior design, a garden, or larger rooms, a more attractive presentation will strengthen the property against the competition.
Reduce the number of vacancies: The most efficient strategy for a landlord to cut operating costs is to keep vacancies to a minimum. A deserted building is no longer a valuable asset. It’s a drawback. You must continue to pay for the property’s upkeep and any outstanding debts. A property pays for itself when a renter lives there. When there is no occupant on the property, it will simply drain your funds.
The fact remains that the higher the value you add to any of your rental property, the higher the rent you may charge on the property. As a result, your CCR will grow. Making your present renters happy and providing value to potential tenants will pay you handsomely in terms of CCR and investment.