While you’d rarely hear anyone talk about cash on cash return outside the world of real estate investing, it’s a common metric in the industry.
Stocks and most other investments are often evaluated by the return on investment (ROI), not the cash on cash return. In order to calculate the ROI, you need to know all the money that you made from an investment in addition to the cash that you invested. However, you cannot possibly know how much a rental property will bring you in total before you sell it.
Thus, it does not make much sense to talk about ROI when deciding whether to purchase a certain investment property or not. Instead, the most popular and relatively easy metric to use in real estate investing is the cash on cash return.
But what does cash and cash return mean? And what is a good CoC return?
In this article, we’ll cover everything you need to know about the cash on cash return metric, including its definition, pros and cons, and formula. We’ll take a look at how to calculate CoC ROI manually, as well as using the top real estate investment analysis tools. We’ll also discuss what a good CoC value is.
Last but not least, we’ll rank the best US cities for long term and short term rentals with good cash on cash return.
Let’s dive right in!
What Is Cash on Cash Return?
Also called the equity dividend rate or the cash yield, cash on cash (CoC) return is a metric used for income-generating real estate assets. It is calculated by dividing the annual cash flow before tax generated by an investment property by the entire amount of cash invested. Then, the result is multiplied by 100 so that the return is expressed as a percentage.
Real estate investors use cash on cash return to measure the net cash flow produced by a property as a proportion of the total amount invested. The CoC return indicates the potential return from a property in a simple form. In principle, the higher the CoC return figure, the healthier the property investment.
For the uninitiated, cash on cash return is different from return on investment (ROI). ROI takes into consideration the entire investment amount, including debt, but we’ll talk more about it later on.
Understanding Cash on Cash Return
The cash on cash calculation is used equally widely in residential and commercial real estate investing. It is the measure of choice for investors who borrow money in order to purchase a real estate asset, as other return metrics do not usually take the method of financing into consideration.
This is what makes cash on cash return a superior metric but also one that is slightly harder to calculate than cap rate, let’s say.
In terms of usage, the CoC formula can be applied at both the property and the market (city or neighborhood) level. It means that investors can use it to choose the top locations for buying a rental property in addition to the most profitable listings for sale.
Just like any other real estate metric, it comes with advantages and disadvantages. So, let’s take a look at them:
Benefits of Cash on Cash Return
The main advantages of the cash on cash return include the following:
- It allows investors to find the best short term and long term rental markets, including both cities and neighborhoods.
- It supports investors in their selection of the top-performing rental properties for sale in any market by comparing different available opportunities.
- It helps investors understand how the amount of cash invested affects the profitability of their property. Generally speaking, the more equity an investor has, the lower the return on investment will be.
- Investors can use it to choose the best loans for investment property, meaning the financing options that will yield the highest return possible.
- Landlords and Airbnb hosts can make use of it even after purchasing an income property to ensure that their investment continues to perform well and outperform the market average.
- It is not as hard to calculate as its alternatives, such as the internal rate of return (IRR).
Downsides of Cash on Cash Return
Meanwhile, the most important disadvantages of the CoC return are:
- It is significantly more difficult to calculate than other return on investment metrics in real estate, like the cap rate.
- Because it factors in pre-tax cash flow, the cash on cash return does not take into consideration the impact of taxes on the profit derived from real estate deals. Meanwhile, taxes can have a significant effect, especially in markets with high income tax rates and property tax rates.
- Investors need access to a lot of long term and short term rental data in order to calculate the cash on cash return expected from one or more properties.
How to Calculate Cash on Cash Return in Real Estate
The CoC return calculation considers the annual long term or Airbnb rental income before tax less the expenses that come with owning and managing a rental property.
Let’s take a look at the mathematical formula for calculating the CoC return:
Cash on Cash Return Formula
The formula for calculating cash on cash return is as follows:
- The Annual Pre-Tax Cash Flow is simply the annual rental income minus the operating expenses. The annual rental income is all the money you collect from renters over a year. The operating expenses include mortgage payments, insurance, property management, maintenance, repairs, utilities, travel costs, home office expenses, etc.
- The Total Cash Invested is all the cash that you must pay in order to make your rental property operational. It means the amount of money to pay to purchase it (down payment), closing costs, rehab costs, and loan fees (if you take a loan from the bank).
Let’s look at examples of the cash on cash return calculation in real estate that will hopefully make things clearer:
Calculating CoC Return Example: Without a Loan
To better illustrate the cash on cash return calculation, let’s consider the following investment scenario:
You buy a rental property that costs $250,000, and you pay the full amount in cash (yes, you are one of those few lucky people with $250,000 available to invest in real estate). You need to pay another 5% in closing costs and rehab costs.
Don’t forget to factor the rehab costs in. It doesn’t make sense to calculate the cash on cash return on your property if you ignore the rehab costs because you cannot rent it out if it’s not in good condition.
So, they add up to $12,500 in additional costs.
Total Cash Investment = $250,000 + $12,500 = $262,500
You can charge $2,100 of rent per month for your rental property.
Annual Rental Income = 12 x $2,100 = $25,200
Estimating the operating expenses at a third of the rental income is fair, leaving you with the following:
Annual Pre-Tax Cash Flow = 2/3 x Annual Rental Income = 2/3 x $25,200 = $16,800
Cash on Cash (CoC) Return = Annual Pre-Tax Cash Flow/Total Cash Investment = $16,800/$262,500 = 6.40%
So, the CoC return that you could generate from this rental property is 6.40% if you paid the entire amount in cash.
Calculating CoC Return Example: With a Loan
Let’s face it. How many of us can actually take $262,500 out of our pockets to pay for a rental property in cash? Not that many, right? That’s why we should also look at the more realistic scenario and see how the COC formula works there. This is where an investor needs to take a bank loan to finance the purchase of their property.
To compare the two cash on cash returns (with and without a loan), we’ll consider the same property as above.
So, we’re buying the $250,000 rental property and paying 25% in cash as a down payment:
Down Payment = 25% x $250,000 = $62,500
We include the same closing and rehab costs of 5% of the total value, adding up to $12,500.
Total Cash Investment = $62,500 + $12,500 = $75,000
Don’t get confused now. When working out the cash on cash return calculation, we only consider the cash money that we pay right away, which means the down payment. You should not include the bank loan here.
Now, we need to calculate the annual pre-tax cash flow. In addition to the rental income (with a plus) and the operating expenses (with a minus), we need to add the debt service to the equation (with a minus). Assuming an 8% interest loan yield:
Debt Service = 8% x $187,500 = $15,000
Annual Pre-Tax Cash Flow = $16,800 – $15,000 = $1,800
New CoC Return
To get the new COC, simply calculate:
Cash on Cash Return = Annual Pre-Tax Cash Flow/Total Cash Investment = $1,800/$75,000 = 2.40%
Thus, the CoC return that you will generate from the rental property if you take out a bank loan for 75% of the price is 2.40%.
If math is not your forte, you might be starting to worry about how to calculate cash on return for a rental property or any property that interests you. There is no need for manual calculations with Mashvisor’s investment property calculator. The cash on cash return real estate calculator will provide you with readily available CoC return for properties of your choice based on your preferred rental strategy (long term or short term).
We’ll talk more about all the functionalities of the Mashvisor tool in a bit.
Comparing CoC Return With and Without a Loan
Just because, in our example, the loan reduced the cash on cash return significantly, it doesn’t mean that it will always happen. Sometimes, taking a loan can actually increase the CoC return; it all depends on the price, the loan amount, the expected monthly rent, etc.
It means that you need to make a cash on cash calculation for every particular property and every specific loan that you consider. It will allow you to choose the optimal combination of property and financing method for your situation.
The Best Cash on Cash Return Calculator for Rental Properties
Given the complexity of calculating CoC real estate return on multiple markets and properties when buying an investment property, it’s important to find a good tool that can help with the process. Due to the availability of various investment property calculators on the internet, you should get access to the most reliable one that will help you make accurate and reliable calculations for your rental properties.
Mashvisor provides a cash on cash return calculator to make the process easy and stress-free for all real estate investors out there. Mashvisor’s calculator shows the average long term and short term CoC return for rental properties in your preferred city or neighborhood.
With the most comprehensive and updated data used in analyzing both rental strategies, property investors will be able to choose the optimal investment approach and make the most informed decision.
Importantly, the rental property analysis conducted by the Mashvisor investment property calculator is not limited to the cash on cash return only but also includes:
- Property price
- Startup costs (broken down)
- Rental income
- Monthly recurring expenses (broken down)
- Cash flow
- Cap rate
- Occupancy rate
To start finding the best cash on cash return properties for sale across the US market, sign up for a 7-day free trial of Mashvisor.
What Is a Good Cash on Cash Return for Investment Properties?
There is no hard-and-fast rule when it comes to deciding a specific figure that should be considered as a good cash on cash return. However, most investors agree that projected cash on cash return of 8% or higher is generally the ideal figure. However, others believe that even those markets with 3% to 7% cash on cash return are still acceptable and could be worth investing in.
If you’re wondering how to calculate the cash on cash return for residential real estate rental properties, you can use the following cash on cash return formula:
Cash on Cash Return = [Annual Cash Flow Before Tax / Total Cash Investment] x 100%
The cash on cash return is calculated as the annual cash flow before tax divided by the total equity invested and multiplied by 100% (to get the percentage). The figure for the cash flow before tax is calculated on the cash flow projection in real estate. The figure for the total cash invested is the initial equity investment (which is the total purchase price of the property less any loan proceeds and closing costs) plus any additional equity required during the holding period.
How Can the Cash on Cash Return by City Help Investors?
The cash on cash return by city is important when evaluating the potential profitability of an investment property. Using this return measure is an excellent way to determine how an investment property in a particular area will perform – helping you decide whether it’s worthwhile to invest in that city or not.
When finding the best location for real estate investing, it’s important to look at the cash on cash return by city to help maximize rental income. If you want to know the right areas to buy an investment property in 2022, we have compiled the top US housing markets with the best cash on cash return for both traditional rentals and Airbnb investment properties.
Best Cities for Cash on Cash Return 2022
Knowing how to achieve good cash on cash return is a crucial part of a sound real estate investment strategy in 2022. As part of their strategy, investors can choose between two types of real estate rental properties: traditional and short term rentals. The final choice depends on the level of risk the investor is willing to take. Below are separate lists of cash and cash return by city for both types of rental properties to help you choose the best option for your real estate investment.
Cash by Cash Return by City for Traditional Rentals
To find the best cities for traditional rental investments in 2022, we’ll take a look at the cash on cash return by city. The figures below were computed by Mashvisor’s cash on cash return calculator.
Here are the 60 most profitable locations for traditional rental properties in 2022:
- Spruce Pine, NC: 9.1%
- Sylacauga, AL: 7.8%
- Espanola, NM: 7.6%
- Owatonna, MN: 7.3%
- Winslow, AZ: 7.2%
- Greenwood, MS: 6.9%
- Emporia, VA: 6.9%
- Mimbres, NM: 6.8%
- Lakeview, OR: 6.8%
- Eight Mile, AL: 6.8%
- Forest Hills, KY: 6.7%
- New Ringgold, PA: 6.7%
- Rotonda West, FL: 6.6%
- Woodburn, IN: 6.5%
- Hobbs, NM: 6.5%
- Dunkirk, IN: 6.5%
- Elkview, WV: 6.4%
- Kansas, OK: 6.4%
- Greers Ferry, AR: 6.4%
- St Gabriel, LA: 6.4%
- Gallipolis, OH: 6.3%
- Fort Madison, IA: 6.2%
- Las Vegas, NM: 6.1%
- Brooksville, KY: 6.1%
- Alma, MI: 6.1%
- Damascus, AR: 6%
- Cushing, OK: 5.9%
- Narrows, VA: 5.9%
- Adelphi, MD: 5.9%
- North Huntingdon, PA: 5.9%
- Stamford, TX: 5.9%
- Newberry, SC: 5.9%
- Doyline, LA: 5.9%
- Spring Valley, MN: 5.8%
- Marietta, OH: 5.8%
- Wolcottville, IN: 5.7%
- Maysville, KY: 5.7%
- Summit, NY: 5.5%
- Princeton, WV: 5.4%
- Pine Hill, NJ: 5.4%
- Suwannee, FL: 5.4%
- Afton, TN: 5.4%
- Duanesburg, NY: 5.3%
- Hinton, OK: 5.2%
- Snowflake, AZ: 5.2%
- Mammoth Spring, AR: 5.1%
- Jacksboro, TX: 5.1%
- Old Forge, PA: 5%
- Godfrey, IL: 5%
- Thermal, CA: 4.9%
- DeQuincy, LA: 4.9%
- Olney, TX: 4.9%
- La Place, LA: 4.9%
- Brackettville, TX: 4.8%
- Rome City, IN: 4.8%
- Richmond, MO: 4.8%
- Pleasantville, NJ: 4.8%
- White Springs, FL: 4.8%
- Durand, MI: 4.8%
- Green Lake, WI: 4.7%
Cash on Cash Return by City for Airbnb Rentals
Some real estate investors are making money in real estate by investing in Airbnb rentals. Short term rental property investments have become a viable source of passive income for many investors. To become successful in short term rental investments, it’s important to check the best-performing markets by analyzing the cash on cash return by city.
Here are the 60 best locations for Airbnb in 2022:
- Winslow, AZ: 10%
- Milan, IL: 9.6%
- Huntingdon Valley, PA: 9.6%
- Salem, AL: 9.6%
- Vinton, VA: 9.4%
- Westover, WV: 9.4%
- Parkersburg, WV: 9.3%
- Feasterville Trevose, PA: 9.2%
- Plymouth, NH: 9.2%
- Creve Coeur, IL: 9.1%
- Meadville, PA: 9.1%
- Black River, NY: 9%
- Cuba, MO: 9%
- Florida, NY: 9%
- Owings, MD: 9%
- Springfield, LA: 8.7%
- Watauga, TX: 8.8%
- Bel Aire, KS: 8.8%
- Lancaster, OH: 8.8%
- Fulks Run, VA: 8.8%
- Caledonia, MI:S 8.8%
- Sparks, MD: 8.7%
- Collingswood, NJ: 8.7%
- Cottage Grove, MN: 8.7%
- Orangevale, CA: 8.7%
- Madison Heights, MI: 8.7%
- Dover, OH: 8.7%
- Hillsboro, TX: 8.6%
- Santa Claus, IN: 8.6%
- Berkeley, NJ: 8.6%
- Ridgeland, SC: 8.6%
- Hainesville, LA: 8.6%
- Lake Wylie, SC: 8.6%
- St Robert, MO: 8.5%
- Cave City, KY: 8.5%
- Garfield Heights, OH: 8.5%
- Chittenango, NY: 8.4%
- Tunkhannock, PA: 8.4%
- Merrillville, IN: 8.4%
- Forest Hill, TX: 8.4%
- Newton, NJ: 8.4%
- Ravenna, OH: 8.4%
- Coventry, CT: 8.4%
- Hamtramck, MI: 8.4%
- Worth, IL: 8.3%
- Marysville, WA: 8.2%
- Oak Grove, KY: 8.2%
- Corunna, MI: 8.2%
- Reidville, SC: 8.2%
- West Fargo, ND: 8.2%
- Ledyard, CT: 8.1%
- Pulaski, VA: 8.1%
- Port Wentworth, GA: 8.1%
- Coolidge, AZ: 8.1%
- Wethersfield, CT: 8%
- Lincoln, RI: 7.9%
- Browns Summit, NC: 7.9%
- Parachute, CO: 7.9%
- Greenwood, DE: 7.9%
- Clearlake Oaks, CA: 7.8%
When investing in Airbnb rentals, it’s important to research the short term rental regulations for a particular state and/or city. Knowing the restrictions per state and/or city is essential in helping you adopt the right investment strategy.
For instance, vacation rentals in certain areas do not allow stays for less than 30 days. It means you should consider investing in Airbnb long-term rentals instead. In some markets, short term rentals are permitted only in primary residences. With this kind of restriction, you can opt to either buy a duplex or another small multi-family home, live in one housing unit, or rent out the rest on vacation rental platforms such as Airbnb, HomeAway, or Vrbo.
Analysis of the 2022 Cash on Cash Return by City
- The best 2022 cash on cash return by city for traditional rentals ranges from 4.7% (Green Lake, WI) to 9.1% (Spruce Pine, NC), with a median value of 6% in Damascus, AR.
- Based on the data presented above, the best location for buying a long-term rental property in 2022 is the Green Lake housing market, with a cash on cash return of 9.1%.
- The states with the largest number of top US housing markets for investing in traditional rental properties in 2022 include Texas, New Mexico, Louisiana, and Ohio.
- The best 2022 Airbnb cash on cash return by city covers between 7.8% (Clearlake Oaks, CA) and 10% (Winslow, AZ). The median value is 8.6% in Ridgeland, SC.
- According to Mashvisor data, as of January 2022, the most profitable market for investing in an Airbnb rental property is the Winslow real estate market, with a city average cash on cash return of 10%.
- The states with the largest number of top US housing markets for investing in short term rental properties in 2022 include Michigan, New York, Texas, and Pennsylvania.
- If we look at the low to medium range cash on cash return values of both the traditional and Airbnb rentals, we can say that short term rentals offer higher yields compared to long-term rentals. This is due to the high daily rates and occupancy rates. Since the US tourism industry is slowly starting to open again after the onset of the pandemic, we can expect to see improved demand for vacation rentals.
- For the high range cash on cash return values, there is no significant difference between traditional and Airbnb rentals, though the latter is still slightly higher.
Start Investing in Rental Properties with the Help of Mashvisor
If you’re ready to invest in rental properties but are not sure which areas to invest in, we can help you make an informed decision based on our in-depth real estate market data analysis. Mashvisor’s database contains hundreds of thousands of properties, as well as complete real estate analytics to help you get started with your rental investment.
To search for the right investment property, just type in a city or your preferred neighborhood to get a quick overview of the houses for sale in that area. Click on the property that interests you to find a more detailed analysis of the average rental income, cash on cash return, median home price, cash flow, price to rent ratio, occupancy rate, and more. Specifically, you can determine the cash and cash return by city so you’ll realize a positive cash flow and a good return on investment.
Use our Mashvisor tools to help you find the right property for your investment goals. Our tools also provide predictive analytics, comparable rental listings, and insights. We can also help you determine which real estate investment strategy would work best in a particular location. Click here to start searching for the best investment properties in your chosen city and neighborhood.