Cash on Cash Return for Real Estate article
How is the Cash on Cash Return for Real Estate calculated for commercial real estate investments and developments? What are the factors that the Cash on Cash Return for Real Estate takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Cash on Cash Return for Real Estate useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.
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Downpayment = $1,023,344
Video Title: Learn about the Cash on Cash Return for Real Estate|
Video Publication_Date: Thursday, September 29, 2016
Video Duration: 5:42
The topic for this commercial real estate investment analysis video is Cash on Cash Return for Real Estate. Throughout the video planEASe Software is used to illustrate Cash on Cash Return for Real Estate. The video does not use the current Proforma Example, but all the factors that the Cash on Cash Return for Real Estate are sensitive to are covered.
In this case the 2010 Cash-on-Cash was calculated by:
|Total Gross Income||$365,472||$372,443||$370,410||$376,040||$384,217||$414,321|
|Less: Vacancy & Credit Loss||19,084||3,202||14,620||5,049||3,501||50,321|
|Total Operating Expenses||$69,400||$71,244||$73,141||$75,094||$77,103||$79,170|
|Net Operating Income||$276,987||$297,997||$282,649||$295,898||$303,614||$284,830|
|Total Debt Service||$230,823||$230,823||$230,823||$230,823||$230,823||$230,823|
|Net Operating Cash Flow||$46,164||$67,174||$51,826||$65,075||$72,791||$54,007|
|Cash on Cash Before Tax||4.51%||6.56%||5.06%||6.36%||7.11%||5.28%|
|2010 Net Operating Income (NOI)||$46,164|
|divide by the Downpayment||$1,023,344|
|equals the 2010 Cash-on-Cash||4.51%|
Down Payment, Scheduled Income (Current Year Only)
Payment (Current Year Only)
, Vacancies (Current Year Only)
(Current Year Only)Ignores:
Time Value of Money
, Sale Proceeds, Loan Balance repayments, Other Years NOI and Debt Service.
... and a lot of other things
Why is Cash on Cash useful?
Cash on Cash is a very popular ratio in commercial investment real estate, and is
typically produced in most investment analysis. I like to think of the Cash on Cash ratio
as telling me how much cash I receive on my cash investment. Because the Cash on Cash
ratio takes financing into account, the investment used in the calculation is how
much the owner had to invest of his own money, and the cash received is the amount
less the debt payment, which is the amount the owner actually gets. For this reason
the ratio can be really helpful when the owner is looking for an investment
that to produce income during the period that it is owned.
A good example might be an investor who has decided to move from one property to
another through the exchange process to avoid the capital gain taxes from a sale.
In this case, the owner is probably more interested in the amount of yearly income
that will be produced by the new property rather than any appreciation
(although having both is best). In this case the Cash on Cash ratio is very
helpful when comparing alternatives.
However, since the ratio does not take into account the amount of sale proceeds
or losses or Time Value of Money
it, in essence, assumes that you receive your exact cash investment back at the end of the investment.
This of course is never true. If you did sell your property in one year
or any year after the sale price will almost certainly be different (hopefully higher),
and there will be costs involved in the sale.
When is Cash on Cash NOT useful?
Cash on Cash is not a
Time Value of Money
measure, which means you can’t compare the Cash on Cash % against the yield
on a bank account, the yield on bonds, or IRR’s. If you are looking at a property
from an owner/user viewpoint the Cash on Cash ratio does not work, because there
is no income for the ratio to use. In years following the initial year you might
need to adjust the initial investment to account for new loans and additional investments.
Adjusted Cash on Cash
for an alternative.
What is the Cash on Cash Sensitive to:
Price, Down Payment, Expenses, Scheduled Income (Rent Increase/Decrease, Vacancy, Reimbursements, Free Rent), Loan Amount, and Debt Payment.
Cash on Cash is shown in these planEASe Reports:
Michael Feakins, CCIM
of planEASe Software