Increasing Cash On Cash Return For Rental Investments


Lately I’ve been dabbling the numbers to maximize the cash on cash return for rental properties. I’m interested in helping others, as well as myself, acquire properties in the Houston area to build wealth, and maximize investment.

I’ve put together a sample deal to explain how to maximize your returns when financing real estate. The goal of this post is to educate buyers on how to increase their returns on their money. I’m also going to prove why real estate is a better investment than the stock market.

Since 2011, the stock market has returned on average a return of 8.3%. Since 1990, the stock market has returned on average a return of 9.4%. Inflation is sitting around 2% annually right now, so realistically you’re getting around 6%, on average, in the stock market.

Here is my sample real estate deal. This is one I’ve found in the Houston area:

Purchase Price: $47,000
Repairs: $5,000
All in: $52,000

Rental rate: $900 / mo – $10,800 / yr
Cash flow: $450 / mo – $5,400 / yr (financed)

CONVENTIONAL – 25% DOWN
Down payment: $11,750
Repairs: $5,000
Closing Cost: $750
Inspection: $300
Total Expenses: $17,800

Cash on cash return: $5,400 / $17,800 = 30%

CASH PURCHASE
Purchase: $47,000
Repairs: $5,000
Closing Cost: $750
Inspection: $300
Total Expenses: $53,050

Cash on cash return: $8,640 / $53,050 = 16.28%

HARD MONEY > REFI 30 YR
Origination: $1,560
Appraisal: $500
Inspection: $300
Closing Cost A-B: $750
Closing Cost B-C: $0
Total Expenses: $3,110

Cash on cash return: $5,400 / $3,110 = 173%

If you notice my last analysis, the hard money to 30 year conventional, I paid 3% for loan origination, and closing cost twice. This is due to having to refinance into a conventional 30 yr mortgage. Note: this can only be done on specific deals that have substantial amounts of equity. Typical HML lenders require 70% LTV.

Also, I did not include closing cost from the B-C closing due to you should be able to negotiate a $0 closing cost if you refinance and let your HML hold the 30 yr note. They are making thousands off the note, they should waive the fees up front. If not, adjust for that in your numbers as well.

Great returns here in the Houston area.. As you can see, leverage is critical in real estate investing. This is how you maximize your investment.

Happy investing

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About redannyday
Danny Day is a local Houstonian who has worked in many different areas of real estate. He blogs about real estate investing, trends, and data that relate to micro and macro markets in the United States, and Houston.

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