Welcome to part 2 on how to calculate return on real estate investment.
What you need to know and the 2 different returns that matter to every single deal.
Hey there, my name is Mike Fritz. I'm the founder of Titanium Capital Investments and the multi-family
CEO system. My greatest passion is helping people just like you create financial freedom with
multi-family real estate. In this 2nd part to a 3-part video series, I'm going to walk you
through how to calculate your cash on cash return because every single investor is going to ask you
this especially if you're raising capital for a deal. And even if you're doing this deal on your
own, you want to make sure you can calculate your cash on cash return. But make sure you stick around
to the end because I have a free gift for you that'll help make this process so much easier.
Let's get started. What is cash on cash return? Maybe you've actually heard that phrase cash
on cash return, but you never fully understood how that return was calculated, how you arrived at it
and what importance it had. Well, let me walk you through what a cash on cash return is.
So, a cash on cash return is simply a metric that tells us how much we're going to make while we own
the deal. So, here's how this works. We have NR divided by CN equals our cash on cash return.
Now, what are these letters? I'm going to walk you through. The first one is our net return. This is
how much money we actually have left over at the end of the month after we pay all of our expenses
and we pay our mortgage payment, what is left? So, you take all your income, you minus out your
expenses and then minus out your mortgage payment and you have what we call a net return. So, you take
your net return and this is the driving metric of your cash on cash. So, you take your net return
and you divide it by CN or cash needed. Cash needed is how much money you had to put into this deal
to actually make the deal happen. And cash needed comes from a couple different places. The first
thing in cash needed is your down payment. How much money do you have to put down to make the deal
actually happen? And not only cash needed but you also have to add in your appraisal, an inspection,
any fees inside the property, if you're charging fees to your investor, as well as your insurance,
utility deposit if they're bigger properties, any legal fees and closing costs. That's your cash
needed, but you have to know that overall number if you're going to know the cash on cash return
because what you're going to take is you're going to take your net return, whatever that number is at
the end of a deal, and you're going to take your cash needed and then you're going to get a cash
on cash return. Now, here's what these 2 letters represent down here. Your net return is a variable,
your cash needed is a constant and here's what that means. You only need your cash needed once. You
put that into the deal once and you have the deal, so this doesn't really change. This is changing
all the time because we should be increasing rent, increasing income, decreasing expenses and
this means we can actually see this number go up. So, cash and cash return should be changing
all the time because this variable is changing all the time. As this net return changes and goes
up, this number changes or if the net return goes down. Let's say you come to a month and you figure
out that the roof needs complete replacement, it's going to be a $25,000 hit to
your bottom line. That's gonna hit your net return and that $25,000 is going to
bring your cash on cash return down. And these kinds of things happen in properties. We have to
kind of plan for them because things happen, things do need to be fixed, things do need to be upgraded.
And so again, you take your net return and that's a variable, that's a good news by the way because
this is a variable, this will determine your cash on cash return. And when you're evaluating a deal
to start, you want to try to get a feel of how variable this actually is. Meaning, how much can you
actually push the income? How much can you actually decrease the expenses? And by pushing this variable
and understanding a little bit of the spectrum of how much you can push this, you'll know how
high your cash on cash return will go. Because one of the things an investor is going to ask you is
"Well, how much money does it make?" Well, what does that even mean? That means how much cash in cash
return is this bad boy pulling in. So, every month if I give you 100 grand, how much money am
I getting back month after month after month, and that is their cash on cash return because
if that's really low, they might think, "You know what? I should go over and invest in the stock
market. It looks like I'm gonna make more money in the stock market." But in video 3 of this
3-part series, we're going to go over how you can make sure your investors never go to the stock
market because that return is going to make them way more money. Now, before I walk you through an
example of what this actually looks like. If you want more content, how to land deals, how to find
money and start growing your wealth and retire in half the amount of time it actually takes,
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bell notification so you get notified every time my crazy face is on a camera. So, now what does this
actually look like? What is this- these are just letters, what does it look like in my actual deal?
So, I want to walk you through a deal I've just accomplished and I just closed on 2 days ago and
I'll walk you through the return on investment. So, the price of this property was 1.05, that's a 5,
1.05 million. So, we paid a million 50,000 for this property. I needed to put into the deal about 391
thousand dollars. So, 391, what is that number? 391 I had to put into the deal. 391 is my cash needed,
that's how much I needed to get into the deal. Now, what did that include? My down payment, appraisal,
inspection, everything that was needed, my legal fees, my closing costs. I needed about 391,000
to get into this deal. Now, this deal is going to net about $49,000 per year. So, 49,000 a year is what
we're going to net off of this property. In part 1 you remember we walked through where these
cash needed numbers come from, what's included and also how we get our net return. So, in this
specific deal, we're going to make about 49 grand a year, it's just over 4 grand a month we also had
to put 391,000 into the deal. That is a 12.5% cash on cash return number. 12.5%. Now, this is
why we wanted this deal. It's a very, very, very good deal and so we're going to start at 12 and a half
percent which is really high. You really want to aim to make sure this is in the 7 to 9 range
unless you have a really strong appreciation play in your property. Because if the value is going to
appreciate a lot, you can accept a little less cash on cash return. But if you can't appreciate
the value a lot, then you want to be really, really careful with low cash on cash returns
because there's really nowhere for you to go and make money. So, first you take your net return. Net
return is income minus expenses, take out your mortgage payment, what do you actually have left
over? And then we take that number and we divide it by how much money it took to actually get the deal
done. Now, we have our COC or cash on cash return. The reason it's called cash on cash, it's the cash
we earn versus the cash we give so it's cash on cash return. That's how that number is created. And
so for you, when you're calculating your cash on cash return and talking to your investors,
you need to know this number because I assure you, any investor that knows anything about real estate
is going to ask you this. And by watching this video, now you know how to walk through it and
make sure you actually get to the numbers so your investors can feel comfortable. I also want to give
you a free gift today that will not only help you with your investors but it'll help you find deals,
find money and continue to grow your portfolio. I have a free multi-family master class that teaches
you the 5 upgrades to make sure you can get a piece of property in 71 days or less. Go into the
description, free multifamilymasterclass.com, click the link and you're going to be taken
straight to our 60-minute training. Make sure you check that out and I'll see you in part 3.