Are you interested in making your money work as hard for you as you worked for it? If so, then you need to look at how you can maximize your cash on cash return for all of your real estate investments. This is a measure traditionally used in the real estate industry. Agents use it to calculate the profitability of an investment. It more accurately assesses the amount of capital that the investor had to put into the investment themselves first.
Most Important Things to Know About Your Cash on Cash Investment Performance
There are several things that you need to know about cash on cash returns. When you are trying to build a real estate empire, it is crucial.
How Do You Define Cash on Cash Return
First, let's define what this term means. You are probably familiar with what a return on investment is. Your CCR is similar. However, it uses the amount of cash you put into the deal yourself. It does not use the total value of the transaction.
Operating Income:
Do you know how much money your property generates for you in a year? That is your operating income.
Total Cash Invested:
How much money did you put down when you got the property? That is the total amount of cash that you invested. Divide your operating income by the total amount of cash that you invested to get your cash on cash return.
Improve the Property
There are plenty of ways that you can improve the return that you get on your investment. The most straightforward way would be to upgrade the property itself. The more desirable a property is, the higher the rent will be when you find a tenant. If you can get someone to pay you more to live in the property, your cash on cash return will be greater. In general, you want to maximize the amount that people will pay to live at the property while minimizing the amount you spend on the property.
Decrease Operating Costs
Your operating costs will be your most significant limiting factor. This is the amount of money it costs you to maintain the property. Every landlord must take care of basic expenses for their property. You must calculate what these are and include them in any plans you make.
Long-Term Renters:
Long-term renters decrease your operating expenses. It is not cheap to find new tenants. You have to interview them, and you have a vacant unit in the meantime.
Fewer Vacant Months:
The most effective way for a landlord to reduce their operating costs is to minimize vacancies. A vacant property is no longer an asset. It is a liability. You still must pay to maintain the property and cover any debt obligations on it. When a tenant is living in the property, it pays for itself. If there is no one living in the property, it is doing nothing but draining your money.
Add New Units to Your Portfolio
Of course, one of the most effective ways for people to increase their cash on cash return is by expanding their portfolio. The more units that you have, the more tenants you can get. As you expand your tenant base, your revenue streams will expand accordingly.
More Revenue Streams:
Each property that you own and represents a new potential revenue source. You can think of it as a business. When you are a landlord, it is like owning many small businesses. You have to take care of each of the properties so that you continue receiving the cash flow from them.
Keeping Your Rental Property Profitable
Are you interested in building a massive rental property portfolio? It is a great way for you to escape the rat race and eliminate your 9-to-5 job. However, it is not as easy as it seems. You must prepare ahead of time if you want to maximize your investment performance. Otherwise, it will be all too easy for you to make mistakes.
