How do you calculate and analyze real estate cash on cash returns properly?

[KevinSJ]

I see a lot of new investors focusing on purchase price or gross rents, but the real metric that matters is real estate cash on cash returns. How do you all calculate this properly? I've seen different formulas and I want to make sure I'm not missing anything. What expenses should be included? How do you factor in vacancy rates and maintenance reserves? And what's considered a good real estate cash on cash return in today's market? Let's talk numbers!

[Elizabeth.S]

Great topic! Real estate cash on cash returns is my favorite metric because it tells you what you're actually earning on your invested cash. The basic formula is (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100. But the devil's in the details. You need to include ALL cash invested: down payment, closing costs, renovation costs, and any other cash you put into the deal. For cash flow, subtract ALL expenses from gross rents: mortgage, taxes, insurance, property management, maintenance, vacancy allowance, capital expenditures reserve. A good real estate cash on cash return today is 8%+, but it depends on your market and risk tolerance.

[DanielB]

When calculating real estate cash on cash returns, don't forget to factor in your time if you're self-managing. Even if you don't pay yourself, your time has value. I see investors getting excited about a 10% real estate cash on cash return but then spending 20 hours a month managing the property. That's effectively minimum wage. Also, be realistic about vacancy rates. In my market, I use 8% for single families and 5% for multi-family. Maintenance reserves should be 1-2% of property value annually. And capital expenditures (roof, HVAC, etc.) need their own separate reserve - I use $200-300 per unit per month depending on property age.

[Riley_H]

I've been trying to understand real estate cash on cash returns better since buying my first property. What I've learned: it's way more complicated than just rent minus mortgage. My property showed great real estate cash on cash returns on paper, but then I had to replace a water heater ($1200) and deal with a vacancy during turnover. Those unexpected costs really eat into your returns. How do experienced investors account for these irregular expenses in their real estate cash on cash returns calculations? Do you just use historical averages? And what about tax benefits - should those be factored into the return calculation somehow?

[Jack54]

This real estate cash on cash returns discussion is exactly what I need to understand better. As a beginner, all these metrics are confusing. So if I'm understanding correctly: real estate cash on cash returns shows me what percentage return I'm getting on the actual cash I put into a deal? That seems way more useful than just looking at purchase price or gross rent. How do you decide what's a good real estate cash on cash return target? Is it different for different types of properties? And should beginners aim for higher real estate cash on cash returns to compensate for lack of experience?