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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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Video Title: Learn about the Cash on Cash Return for Real Estate

Video Publication_Date: Saturday, October 19, 2013

Video Duration: 5:42

Video Description:
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.

Downpayment = $1,023,344
201020112012201320142015
Total Gross Income$365,472$372,443$370,410$376,040$384,217$414,321
Less: Vacancy & Credit Loss19,0843,20214,6205,0493,50150,321
Effective Income$346,387$369,241$355,790$370,992$380,717$364,000
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 Tax4.51%6.56%5.06%6.36%7.11%5.28%

In this case the 2010 Cash-on-Cash was calculated by:

2010 Net Operating Income (NOI)$46,164
divide by the Downpayment$1,023,344
equals the 2010 Cash-on-Cash4.51%


Considers: Down Payment, Scheduled Income (Current Year Only), Debt Payment (Current Year Only), Vacancies (Current Year Only), Expenses (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. Try the 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:

Written by
Michael Feakins, CCIM
of planEASe Software