Cash on Cash Return: A Key Metric for North Carolina Multifamily Investors

Understanding Cash on Cash Return in North Carolina’s Market

Cash on cash return measures the annual pre-tax cash flow generated by a property relative to the initial cash investment. For North Carolina multifamily investors, this metric is particularly useful given the state’s diverse real estate landscape, from bustling urban centers like Charlotte and Raleigh to growing secondary markets like Greensboro and Winston-Salem. According to recent data, the average cash on cash return for multifamily properties in North Carolina ranges from 8% to 12%, making it an attractive option for investors seeking reliable income streams (Vales Properties, Mashvisor).

The formula for calculating cash on cash return is:

$$\text{Cash on Cash Return} = \frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Cash Invested}} \times 100\%$$

For example, if you invested $500,000 in a Raleigh apartment complex that generates $50,000 in annual pre-tax cash flow, your cash on cash return would be 10%.

Why Cash on Cash Return Matters in North Carolina

Cash on cash return is particularly relevant for North Carolina multifamily investors for several reasons:

1. Market Comparison: It allows investors to quickly compare opportunities across different North Carolina markets, from coastal properties in Wilmington to mountain retreats in Asheville. The state’s varied economic conditions and demographic trends can significantly impact rental income and property performance.
2. Financing Impact: North Carolina’s varied lending landscape means financing terms can significantly impact returns. Cash on cash return takes these effects into account, helping investors understand the implications of their financing choices on overall profitability (Investopedia).
3. Cash Flow Focus: With North Carolina’s strong job market and population growth driving rental demand, cash flow is a critical consideration for many investors. The state has seen a surge in demand for rental properties, particularly in urban areas where job opportunities are abundant (Henderson Investment Group).
4. Simplicity: The straightforward calculation makes it accessible to both seasoned investors and those new to North Carolina’s multifamily market. This ease of understanding allows investors to make quick assessments of potential investments.

Calculating Cash on Cash Return for North Carolina Properties

To calculate cash on cash return for a North Carolina multifamily property, you’ll need:

1. Annual Pre-Tax Cash Flow: This is the money left over after all operating expenses and debt service have been paid, but before taxes.
2. Total Cash Invested: This includes your down payment, closing costs, and any immediate repairs or renovations required.

Example Calculation

Consider an example in Charlotte’s thriving multifamily market:

Suppose you purchase a $2,000,000 apartment complex with a $400,000 down payment and $50,000 in closing costs and initial repairs. Your total cash invested is $450,000.

The property generates $200,000 in annual rental income. After subtracting $100,000 for operating expenses (property management, maintenance, property taxes, insurance) and $60,000 for mortgage payments, you’re left with $40,000 in annual pre-tax cash flow.

Applying our formula:

$$\text{Cash on Cash Return} = \frac{\$40,000}{\$450,000} \times 100\% = 8.89\%$$

Interpreting Cash on Cash Return in North Carolina

What constitutes a “good” cash on cash return can vary depending on factors like location, property type, and overall market conditions. In North Carolina’s competitive multifamily market, many investors consider a cash on cash return between 8% to 12% to be attractive. This range aligns with the state’s strong rental demand and growing economy, which supports property appreciation and income generation (Mashvisor, Wall Street Prep).

However, it’s important to note that cash on cash return is just one metric among many. At Vales Properties, we use it in conjunction with other measures like cap rate, internal rate of return (IRR), and total return on investment (ROI) to get a comprehensive view of an investment’s potential in North Carolina’s dynamic market.
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In July 2024, the average monthly cash on cash return in Pinehurst is 3.00%. Effective July 1, 2024, the current interest rate for Single Family Housing Direct home loans is 4.875% for low-income and very low-income borrowers. The median list price of Airbnb properties available for sale in Charlotte is $435,000 and the average price per square foot is $208. Duke University Health charts three hospitals in the top 10 of annual BNC rankings.

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Improving Cash on Cash Return in North Carolina Multifamily Investments

To potentially improve your cash on cash return in North Carolina’s multifamily market, consider:

1. Increase Rental Income: Look for value-add opportunities in growing markets like Durham or Cary, where strategic improvements can justify higher rents. The demand for quality rentals is particularly high in these areas, making them ripe for investment.
2. Reduce Operating Expenses: Implement energy-efficient upgrades, which are increasingly valued in North Carolina’s environmentally conscious markets. Reducing utility costs can significantly enhance cash flow.
3. Optimize Financing: Take advantage of North Carolina’s competitive lending environment to secure favorable loan terms. Lower interest rates can improve your cash on cash return by reducing monthly mortgage payments.
4. Target High-Growth Areas: Focus on North Carolina markets with strong population and job growth, which can support rental demand and potential rent increases. Areas like Charlotte and Raleigh are experiencing significant growth, making them attractive for multifamily investments (Henderson Investment Group, Wall Street Prep).

Limitations of Cash on Cash Return in North Carolina’s Market

While cash on cash return is valuable, be aware of its limitations in the context of North Carolina’s multifamily market:

1. Short-Term Focus: It doesn’t account for long-term appreciation, which can be significant in rapidly growing North Carolina markets. Investors should also consider potential equity buildup over time.
2. Pre-Tax Calculation: The metric doesn’t consider North Carolina’s specific tax implications, which can vary by location and investor situation. Understanding local tax laws is crucial for accurate financial planning.
3. Market Volatility: Cash on cash return can fluctuate with market conditions, which vary across North Carolina’s diverse regions. Investors should monitor local market trends closely to make informed decisions.

Conclusion

Cash on cash return is a crucial tool for evaluating multifamily investments in North Carolina’s dynamic real estate market. By providing a clear picture of an investment’s cash flow efficiency, it can help you make informed decisions and optimize your portfolio’s performance across the state.

At Vales Properties, we specialize in identifying and analyzing multifamily investment opportunities throughout North Carolina. Our team’s deep understanding of local markets, combined with our data-driven approach, allows us to pinpoint investments with strong cash on cash returns and overall growth potential.

Ready to explore multifamily investment opportunities in North Carolina with attractive cash on cash returns? Contact Vales Properties today to learn how we can help you achieve your real estate investment goals in the Tar Heel State.

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