Deciding whether to rent or sell a property involves evaluating potential returns. The cash on cash return (CCR) metric helps investors compare the profitability of holding onto a property versus selling it. Understanding how to calculate and interpret CCR can assist in making informed decisions.
What Is Cash on Cash Return?
Cash on cash return measures the annual return on the actual cash invested in a property. It is expressed as a percentage and provides insight into the property's income-generating potential relative to the initial investment.
Calculating Cash on Cash Return
The formula for CCR is:
CCR = (Annual Cash Flow / Total Cash Invested) x 100
Annual cash flow includes rental income minus operating expenses and debt service. Total cash invested covers the down payment, closing costs, and any initial repairs or improvements.
Using CCR to Decide Between Renting and Selling
Investors compare the CCR of holding a property as a rental versus the potential profit from selling. A higher CCR indicates a better return on the invested cash, favoring holding the property. Conversely, a low CCR may suggest selling is more advantageous.
For example, if the CCR from renting is 8% and the expected sale profit exceeds this rate, selling might be preferable. Factors such as market conditions, property appreciation, and personal investment goals influence this decision.
Key Considerations
- Market Trends: Rising property values may favor selling.
- Cash Flow Stability: Consistent rental income supports holding.
- Tax Implications: Taxes on sale versus rental income can impact net returns.
- Personal Goals: Income needs and long-term plans influence choice.