Why Cash-on-Cash is Important
As a rental property investor, it's helpful to know your current return on the total amount of cash you have contributed to a particular Portfolio or Property. This allows you to easily compare investment results across assets of various sizes and types. When properly calculated, the cash-on-cash return is a highly accurate indicator of actual investment performance that takes into account cash flow, your actual cash into the deal, and the impact of any debt and capital expenses.
To learn more about why investors love knowing their cash-on-cash return, read Why Successful Rental Property Owners Focus on Cash-on-Cash Returns on the blog.
Where to Find Your Cash-on-Cash Return
You'll find the Cash-on-Cash Return metric on your Stessa dashboards, at both the Portfolio and Property levels. It's located on the left side underneath the Net Cash Flow chart.
The percentage in the larger font is your calculated return for the most recent twelve month period, also known as a trailing-12 metric (T12). Keep in mind that any individual month can fluctuate significantly due to capital expenses, non-payment of rent, the specific timing of rent payments, and any number of other surprises. The T12 figure is not as heavily impacted by a single one-off event and is thus generally accepted as a more reliable indicator of actual investment performance.
Underneath the percentage is your total "cash in" figure, which is provided for reference and is the denominator used in the return calculation, discussed below.
Click "View Monthly Cash-on-Cash" to open up the chart and see how your monthly cash-on-cash return has changed over time. Hover your cursor over any historical data point to see the actual percentage.
How Stessa Calculates Cash-on-Cash
Here's the formula Stessa uses to calculate your cash-on-cash return:
Net cash flow for the month
(after all debt service, including capex, not including transfers)
less original mortgage balance
less SUM of all net cash flow prior to "date placed in service"
While some investors may calculate cash-on-cash return slightly differently, perhaps by adding principal payments back into the numerator or excluding certain capital expenses, the calculation shown above is what's currently displayed in Stessa.
Troubleshooting Your Cash-on-Cash Return Metric
To troubleshoot the numerator (net cash flow for the month), you'll want to connect all relevant bank and loan accounts to Stessa. Then make sure everything is categorized and assigned to the correct property.
Run a Net Cash Flow report to cross-check your cash-on-cash math against the Net Cash Flow line in the report.
If a rental income transaction shows as deposited on the last day of the prior month instead of the first day of the month for which it was due, you may want to adjust the transaction date for accuracy. Otherwise, you'll show a high cash-on-cash return number for the first month and an artificially low number for the next month.
To troubleshoot the denominator, start with your acquisition price. You can check this on the Properties page. Click the small edit icon next to any numbers you'd like to update. While you're there, also make sure you've set up a date placed in service for the property.
Finally, you'll want to ensure all closing costs are reflected on your Transactions page and properly categorized.
Next, examine your mortgage set up, to make sure all relevant loans have the correct "Original Loan Amount" entered. To check and/or edit this amount, return to the Properties page, click the edit icon next to the respective "Loan Balance." Then click the edit icon on the "Mortgage" card below the yellow highlighting on the new page. Update the original balance accordingly.
Finally, make sure all of your capital expenses have been entered accurately via your Transactions page, with the correct dates. Any capital expense transactions incurred before your date placed in service will automatically be added to your "cash in" number for purposes of the cash-on-cash return calculation. Any capital expenses incurred after the date placed in service will impact the net cash flow used to calculate the numerator for the month.
The cash-on-cash metric originated as a user request via the Stessa Community Wishlist. If you'd like to contribute further ideas and feedback, please review existing topic threads and submit a new post if desired.
If you're having trouble with your cash-on-cash return calculation, feel free to open a new support conversation via the blue circle at lower right once logged into Stessa.