cash on cash return

[Sam Rios]

Hi, I just want to better understand how this works....when figuring the cash on cash return, the figures on the mortgare/ points / and closing costs, are these figures coming out from the seller side of their finacials, or is this when I'm looking for financing???

[Nathan Emmert]

Ryan nailed it with both his confusion and his explanation.

The "cash" into a deal can be several things... it can be the purchase price (if buying in cash), it can be the down payment (if financing), it can be closing costs (if not paid for by the seller), it can be repair costs (if required and not rolled into the mortgage), it can be back taxes or other cash expended to close the deal... whatever it is.

The denominator (bottom number) in your CoC return is quite simply the sum of every single dollar you have sunk into the property to get the rental stream started. The top number is your free cash flow on the property after all expenses.

Take a property for $120,000. It's rent ready, you put $20,000 down and have the seller cover closing costs in the purchase price. You mortgage the other $100k for a payment of say $555 a month. On your $120,000 property, you generate $2,000 in monthly rent. Assuming the 50% rule on expenses, your NOI is $1,000 a month, your free cash flow is $445 a month. Annually, you generate $5,340 in free cash flow.

For cash on cash, you have $5,340 / $20,000 = 26.7%. You are generating a 27% return on your $20,000 investment each year.