"Cash
on Cash" return is a measurement (expressed in a percentage)
of the return on the actual cash or equity invested into an income producing
property. (learn more)
The debt service
coverage ratio (DSCR) is a widely used tool for lenders to evaluate
the ability for a property's income to cover the monthly and annual
debt service. (learn more)
The Loan-to-Value
Ratio (LTV) is the ratio between the loan amount (or balance) and
the market value (or price) of the property expressed as a percentage.
(learn more)
"Cash
on Cash" return is a measurement
(expressed in a percentage) of
the return on the actual cash
invested into an income producing
property.
To
calculate a "Cash on Cash"
return, you divide the before-tax
cash flow into the amount of
cash invested.
Example
Price
of Property:
$1,200,000
Equity
(cash) required:
300,000
Mortgage
Amount:
900,000
Net
Operating Income (NOI):
(9.17% Cap Rate)
110,000
Annual
Debt Service:
($900K @ 7.00% interest,
20 year amortization)
83,732
Cash
Flow Before Tax:
26,268
Cash
on Cash Return:
8.76%
The
"Cash on Cash" return
is used as a benchmark by investors
to evaluate the profitability
of an income property.
The
"Cash on Cash" return
is not the full picture however,
since it does not take into
consideration fluctuations in
NOI, property appreciation or
depreciation, tax ramifications,
potential capital infusions,
individual income tax situations
and/or estate issues, and reserves.
Investors
should prepare a "Cash
on Cash" worksheet in order
to assist in the overall evaluation
of a property, but should take
other pertinent issues into
consideration.
Upland
Capital Advisors | 50 South 6th Street, Suite 1418 |
Minneapolis, MN 55402
