Pricing an investment property accurately is essential for successful selling. One useful metric for investors is the cash on cash return, which helps determine the property's profitability relative to the cash invested. Understanding this metric can give sellers confidence when setting a price and negotiating with buyers.
What is Cash on Cash Return?
Cash on cash return is a percentage that measures the annual return on the actual cash invested in a property. It considers the net income generated from the property divided by the total cash invested, excluding financing costs. This metric helps investors evaluate the profitability of their investment.
Calculating Cash on Cash Return
To calculate cash on cash return, use the following formula:
Cash on Cash Return = (Annual Net Operating Income / Total Cash Invested) x 100
For example, if an investor puts $50,000 into a property and earns $5,000 annually after expenses, the cash on cash return is 10%. This helps determine if the property meets the investor's desired return threshold.
Using Cash on Cash Return to Price Your Property
When selling, understanding the typical cash on cash return for similar properties can guide pricing. If an investor expects a minimum return of 8%, the asking price should align with the property's income potential and the investor's initial cash investment.
For example, if the property's net income is $10,000 annually and the investor's target return is 8%, the maximum price they should accept is:
Maximum Price = $10,000 / 0.08 = $125,000
Benefits of Using Cash on Cash Return
This metric provides a clear view of profitability, helping sellers set realistic prices. It also assists buyers in evaluating whether a property aligns with their investment goals. Using cash on cash return fosters confidence in pricing decisions based on tangible financial data.