As you research the real estate investment market being decent at math helps. Not because you’ll need to brush up on your Algebra II class but there some basic numbers you’ll need to know before making any investment. Of course, if you’re looking for monthly cash flow the math is relatively easy as youcash on cash returns need to subtract your financing and mortgage costs as well as expenses related to owing the home from your gross monthly rent.

If you bring in more than you shell out you’re cash flowing and if the numbers are negative it’s time to move on to the next potential investment. One number you will get familiar with is the “cash on cash” return. What is that?

You’ve probably heard the term bandied about the more you dig deeper in the world of real estate but it’s a way for you to compare different scenarios regarding cash flow. Similar to calculating capitalization rates, a cash on cash return provide a quick overview of a property’s potential. To calculate a cash on cash return, simply divide monthly cash flow with how much cash you will put into the property once purchased.

Say you have a property in mind you can get for $200,000. You determine your down payment will be 25 percent of the sales price, or $50,000. You also estimate the loan will require $5,000 in closing costs and your contractor has determined you will need another $10,000 for renovations. When you add up your cash outlay of $65,000 which includes down payment, closing costs and renovations, divide that amount into your annual cash flow. In this example, if you net $500 each month, your cash on cash return is

$6,000 divided by $65,000 = 0.923, or 9.23%.

Another prospect to consider sells for $180,000, your 25 percent down payment is $45,000, closing costs are $4,500 and only minor repairs are needed to the tune of $2,000.  Your cash outlay is then $51,500 and you net $375 each month, or $4,500. You cash on cash return is

$4,500 divided by $51,500 = 0.874, or 8.74%.

There are other factors to consider beyond cash on cash returns, but knowing how to calculate the return and how expenses affect the acquisition, cash on cash is a great place to start.