My husband and I close on our first investment property in 2 weeks!! Woohoo!
I have 2 questions related to cash on cash return. I have zero background in finance or accounting (I majored in biology) so I need some guidance on these. We've used the rental calculators to figure out all the numbers, returns etc but I'm wondering about 2 things:
1) We have a business credit card that we just opened that has a 9 month interest free period. The property will be a rental that needs a good amount of work up front to fix it up (will be like a BRRRR) like electrical, plumbing, floors, paint, reno on bathroom and kitchen. So if we are using this business credit card to buy some of the materials for the reno, then we rent it out, then we use the cash flow to start paying the balance down, how will that effect the cash on cash return? Is it no different than when you're investing cash out of your own pocket? Or does cash flow from the business effect cash on cash return differently?
2) Related to the above, I'm wondering in general how using the cash flow from the business to pay for future expenses effects cash on cash return. In the "estimated repairs" field in the rental property calculator, we've currently got 25K there. However if we were to wait and use 5K of cash flow instead to pay for something after 1 year of renting, would that decrease the "estimated repairs" number to $20K in that calculator or would it make no difference whether it's cash from the business or personal cash out of pocket as far as the cash on cash return calculation is concerned? I guess I'm partially thinking of that "estimated repairs" field as "cash out of pocket" and I'm curious if cash out of pocket and cash flow to pay for things effects the cash on cash return differently.
I hope these questions make sense. Let me know if more info on the situation would be helpful. Thank you!!
@Monica Evans cash on cash is pretty simple. You will need to look at your total cash outlay to buy, renovate and manage the property for the year when you are running your calculator. This means you will count the credit card interest to. Anything that is left over after paying for the down payment, closing costs, operating expenses, mortgage payment, credit card interest, etc is cash flow. You total the cash flow for the year and then divide by the total cash outlay. This gives you your COC return.
If you use cash flow to pay for expenses then you don't really have cash flow! Cash flow is what is left over after everyone else has been paid.