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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 |
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Less Vacancy Amount 2,500 |
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Gross Operating Income 52,000 |
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Less Operating Expenses 17,000 |
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Net Operating Income 35,000 |
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Less Annual Debt Service 20,000 |
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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
$97.99, 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.
©
Copyright 2000 - 2012 Advantage
Software LLC |
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