What is CASH on CASH and what's a good return

In General Area - Asked by Roger H. - Oct 19, 2009
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Charlie K.
Irvine, CA

The way to figure cash on cash return is to divide your cash flow after dept service by the total purchase price. For example... if the purshace price of the property you are buying is $ 1,000,000 and the NOI (Net Operating Income) less the operating expenses is $ 100,000 then your Cash on Cash return is % 10 (percent).

Oct 19, 2009
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Issa T.
Orland Park, IL

Cash on Cash is taking the first year before taxes NOI and divided by the initial investment or down payment. For example, if an investment property was purchased for $1,000,000 and the initial investment or down payment is $200,000, where $800,000 will be financed. Let's assume that the first year NOI after operating expenses and annual debt services is $20,000,.... one can calculate $20,000 / $200,000 or a 10% cash on cash return on the first year. An investor needs to have a down payment (initial investment) when purchasing an investment property to calculate cash on cash.

Oct 20, 2009
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Tom P.
Clearwater, FL

Issa's answer is essentially correct. As to what constitues a good return, that is up to your tolerance for risk and the nature of the investment. Is it dirt, or is it the property leased to a large, credit worthy tenant?

Oct 21, 2009
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Robert P.
Lake Oswego, OR

Cash on cash is simply the anualized cash flow returned from operations related to the equity. It can be for more than one year. C on C Year 1 = $X; year 2 C on C = $Y. Put down $100K in initial equity and got back $6,900 in year 1 that's 6.9%. Year 2 produced $7,300...that's a 7.3% Cash on Cash return.
Cap Rate is only for the initial year of acquisition. It is the NOI/Purchase price. In effect it measures what the first year's return would be if you paid all cash for the asset. If I paid $1,000,0000 for a property and owned it outright...and it's operations produced $73,000 I bought it at a 7.3 Cap. This tells you about the economic vitality of the revenue producing engine...with financing impacts being eliminated.
Equity Multiplier is the amount of value each dollar of NOI contributes to imputed price at a given Cap Rate. Figured: Selling Price/NOI. At a 5 cap the EM for each $1 of NOI is 20 . At a 7 cap that same dollar of NOI is worth $14.28 and at a 9 cap that same NOI buck is only worth $11.11. Knowing how EM works and what the multiplier is for the current market allows you to evaluate value add opportunities.
Internal Rate Of Return is another valuable measurement that factors in not only gains from operations, but loan paydown, depreciation and tax impacts.
Great resource: "What Every Real Estate Investor Needs to Know about Cash Flow... and 36 Other Key Financial Measures"

Oct 21, 2009
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Gregory G.
San Francisco, CA

Cash on Cash is what percent return you get after debt service. Even more important you might take a look at IRR.
Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531

Oct 23, 2009
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