When making your real estate investments, one of the metrics you should be looking at is the cash on cash return on your investment. This is a great indicator of how profitable your investment will be on a yearly basis. So what is cash on cash? Let me explain.
The cash on cash return on your investment is calculated by taking the annual before tax cash flow divided by total cash invested. It looks something like this:
The $60,000 is the cash flow that comes out of the rents before taxes which equals about $5,000 / month. The $300,000 is the total investment in the building. The .20 or 20% is the cash on cash return on this investment. Keep in mind 20% is not a standard cash on cash return. Anything between 7% and 15% is a good cash on cash return under normal circumstances.
For more on cash on cash returns go to this link: http://en.wikipedia.org/wiki/Cash_on_cash_return
Good luck and happy investing.