What is it? Cash-on-cash return is the ratio used by real estate buyers to measure whether an investment is successful. And by successful, I mean profitable. Making money is the obvious goal for real estate buyers in any area, especially here in sunny San Diego.
You might be more familiar with the idea of calculating return on investment (ROI) than cash-on-cash return. ROI is more commonly associated with stock purchases. Cash-on-cash return relates more specifically to the world of real estate investing.
Also referred to as the equity divide rate, your cash-on-cash return is determined by dividing the annual before-income-tax cash flow Net Operating Income (NOI) by the amount of cash you’ve invested. Note: The investment sum includes your down payment and/or equity.
You can also think of cash-on-cash return as the NOI minus debt service, capital expenditures and leasing costs all divided by the equity amount of the purchase price of the property.
Why should you consider cash-on-cash return as opposed to ROI when deciding whether to invest or not in a particular company? Simply, because won’t know how much income a rental property will bring in until you decide to sell it.
And when you do sell your property, you’ll want to do what’s known as a 1031 exchange.
Doing a 1031 Exchange in San Diego
Named after an IRS code, a 1031 exchange is a strategy that legally allows an investor to defer payment of capital gains taxes after selling an investment property. It entails buying another property with your sale profit.
It’s highly recommended that you enter into this margin-boosting process with a highly qualified 1031 exchange services professional. At Sunset Property Management, that’s our specialty. We look forward to the opportunity maximize cash-on-cash return and find the ideal rental property for you.