Cash-on-Cash return measures annual net income divided by total cash invested. Flip and Danny walk through the calculation: $3,000 net income on $20,000 invested equals 15%. Investors use it to compare properties and financing options, unlike cap rate which doesn't account for leverage.
Hey, everybody, Flip and Danny here, founders of the Freedom Real Estate Group family of companies, welcome to another episode of.
Our podcast called Freedom through Passive Income.
That's right. And today our episode is called Cash on Cash Turn. Now, this has nothing to do with Johnny. This is Cash on Cash Return. You hold Johnny Cash. No, no.
At the beginning I thought you said Cash on Cash Turn.
And I was like, cash and Cash return return are returning. Cash on Cash return has nothing to do with Johnny. You know the singer, right?
No.
Okay. Oh, my gosh. And so we're going to explain how to calculate it and why it's important.
Are you done?
I am.
Okay, I'm gonna take over now. So you're gonna start by calculating it. You're gonna figure out how much you put into the. Into the deal. So that could be your down payment, that could be other fees, could be closing costs. Whatever it is you're going to calculate at closing. How much should I pay in cash to get into this deal? The second thing that you're gonna do, Cash on Cash returns are typically calculated over a period of one year. So over one year, you're gonna want to understand how much of the money that you kept from the return. So you're going to have your income here. You're going to have all of your expenses. Do not forget your mortgage. That's a big piece of the Cash on Cash return.
Yes, it is.
So income, all expenses, minus your mortgage, that's going to be the bottom line number. And all this is pre tax, by the way. That's going to be the second number that you're going to use in order for you to calculate the cash on Cash return, which you're going to talk about.
Right. Just a second before I get in the calculation, make sure you hold my ass. Don't do it while you're driving. But again, if you're on YouTube, Facebook, LinkedIn, whatever, social media, and you can get that, like, button, that love button, make sure you hit it right. Now, again, this is all for the algorithms of whatever. Whoever.
Whoever does this stuff.
Yeah, yeah. But anyway, right now, Lisa, thank you. Yes. Okay, so the calculation. So you want to take that net income that you just talked about the last 12 months. Pre tax.
Yes.
You're going to divide that by the actual amount of cash that you invested.
Yes.
Okay. That's going to equal your cash on cash. So say at the end of the year, you're. That calculation gave you $3,000.
Yes.
That's everything.
Yes.
Minus expenses, minus your mortgage, $3,000. But you put $20,000 down when you bought or down or in or whatever. You spent $20,000 when you bought the house. Okay, so 3,000 divided by that 20,000 equals 15%. So your cash on cash number on this Property would be 15%, which is.
Not a horrible number. That's actually pretty good. So why is this important? This is important because if you are financing something well, there's two reasons. If you're financing something you want to know, you want to be able to compare two vehicles, right? So if I put this much down versus this much down, what does that mean to me later? Is it better to put only 3 and a half percent down? 5, 10, 25 depending on the type of loan that you're getting? This is one of the reasons people calculate the cash on cash return is to evaluate financing programs to see how much they're going to put in and then what is there going to be their estimated, you know, 12 month return after a mortgage, mortgage payment, what does that return? And then they compare the other lending program and do the same and that gives them, you know, a higher cash on cash, the better that it's going to be. Now the other thing that you can do is evaluate properties the exact same way. If you're going to buy this property and this property, but you already know what type of mortgage that you're going to do. Plug in the numbers of how much you're going to spend on this one, how much you're going to spend on this one, what is the net amount that you're going to have after it's all said and done, including your mortgage payment, and compare those two cash on cash returns. Yes. So that's why it's important. That's why people use the number. Us personally, we evaluate almost everything by cap rate because we use so many private lenders and everything that we do, or we're taking loan assumptions or there's just a lot of different variables. But so we evaluate primarily by cap rate. But a lot of people do use cash and cash return. And if that's you, and if you feel that's better for you, we wanted to be able to talk about it, explain it and share all this info with you.
Well, excellent. Hit that like button, hit that love button again. Comment, please comment. Questions? Recommendations? Let us know how we're doing. If you're driving, obviously do this later. But if you're watching us right now, you're probably already on the Facebook group. But if you're not right up here, facebook.com groups freedom through passive income. There you go. LinkedIn. We don't have one of the cool URLs, but go to LinkedIn, go to the search bar, type in Freedom through passive Income. Freedom through passive Income and you'll find our group that way. But we're also at TikTok, Instagram, I think that's it. Facebook, LinkedIn, YouTube. Go to YouTube. Make sure you subscribe to our channel on YouTube. That way you get notifications when we have another one of these episodes releasing.
Which is every day, 365 days a year.
But we like to keep these short and sweet. And we also like to end with invest smart, live happy. Bye, everybody.
Bye.
Nothing in the show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, financial or business professional for individualized advice. Opinions and information on the show are not guaranteed. All investment strategies have the potential for profit or loss.
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