cash on cash return for commercial investment real estate
Post on 17-Jul-2015
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Cash on Cash
for commercial real estate investments and developmentswww.planease.com1Why is Cash on Cash useful for commercial real estate?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.
www.planease.com2Why is Cash on Cash useful for commercial real estate?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.
www.planease.com3Cash on Cash
Considers / IgnoresConsiders: 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, All Financing (Loans), Other Years NOI and Debt Service.
... and a lot of other things www.planease.com4Price, Down Payment, Expenses, Scheduled Income (Rent Increase/Decrease, Vacancy, Reimbursements, Free Rent), Loan Amount, and Debt Payment.What is the
Cash on Cash
Sensitive to?www.planease.com5Cash on Cash Example2010 Net Operating Income (NOI)$46,164divide by the Downpayment$1,023,344equals the 2010 Cash-on-Cash4.51%201020112012201320142015Total Gross Income$365,472$372,443$370,410$376,040$384,217$414,321Less: Vacancy & Credit Loss19,0843,20214,6205,0493,50150,321Effective Income$346,387$369,241$355,790$370,992$380,717$364,000Total Operating Expenses$69,400$71,244$73,141$75,094$77,103$79,170Net Operating Income$276,987$297,997$282,649$295,898$303,614$284,830Total Debt Service$230,823$230,823$230,823$230,823$230,823$230,823Net Operating Cash Flow$46,164$67,174$51,826$65,075$72,791$54,007Cash on Cash Before Tax4.51%6.56%5.06%6.36%7.11%5.28%www.planease.com6Watch Video
about Cash on Cashwww.planease.com7Try out this ratio yourself !!!planEASe Full Access 7 Day Free TrialFree for 7 days, allows access to the full suite of products risk free. Includes saving, printing, creating websites, and all the analysis capabilities.FREE TRIALwww.planease.com8