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Cash on Cash Return is a percentage that measures the return
on cash invested in an income producing property. It is
calculated by dividing before-tax cash flow by the amount of cash
invested (down payment amount) and is expressed as a percentage.
If before-tax cash flow for an investment property is equal to
$15,000 and our cash invested in the property is $100,000, cash on
cash return is equal to 15%. |
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Before-Tax Cash Flow $15,000 |
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Cash on Cash Return = ------------------------------ X
100 = --------------- X 100 = 15% |
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Cash Invested $100,000 |
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The following shows how before-tax cash flow is derived. |
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| Gross
Income 54,500 |
| Less Vacancy
Amount 2,500 |
| Gross Operating Income
52,000 |
| Less Operating Expenses
17,000 |
| Net Operating
Income 35,000 |
| Less Annual Debt Service 20,000 |
| Before-Tax Cash
Flow 15,000 |
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The Cash on Cash Return is
used to evaluate the profitability of income producing properties.
It is an important analysis tool when comparing multiple income
properties. The investor should rank income properties based
on their potential return on investment and the cash on cash return
should be given a strong weighting.
However, the cash on cash return calculation does
have some limitations. It is a before tax calculation and doesn't
include the impact of an investor's tax bracket on their returns.
Also, it doesn't
consider the wealth building potential of a property via
appreciation. A property in one area of a city may have a
better cash on cash return then a property in another location, but
it may not appreciate as fast because of it's location. One
location may be more desirable than the other. The
investor should look at a property's cash on cash return and the
potential for appreciation when determining which income
property to purchase.
The On Target real estate investment software summarizes the
before and after-tax Cash on Cash return for an income producing property
over a 10 year period on the cash flow statement and in the Ratio
Analysis report. The cash on cash return in your first year of
operation or at the time of purchase is the most important.
Each successive year is based on your income growth rate and
expense growth rate assumptions. The cash on cash return is a
one of several very important ratios that measure the profitability
of an income producing property. If you would like to purchase the
On Target real estate software for $97.95, click
on
Purchase
Software
Click on
Software Features
to learn more about On Target. The On Target real estate investment
software includes a 30 day money back guarantee and free support.
(c) Copyright 2000 - 2010 Advantage Software
LLC |
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