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Cash Flow Analyzer

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Definitions


Internal Rate of Return

Modified Internal Rate of Return (MIRR)

Net Operating Income (NOI)

Loan to Value Ratio (LTV)

Cash on Cash Return

Capitalization Rate

Gross Rent Multiplier (GRM)

Debt Coverage Ratio (DCR)

Real Estate Terms

Cash on Cash Return


Cash on Cash Return is probably the most important ratio you need to focus on when evaluating the long-term performance of a property investment. Cash on Cash Return is the property's annual net cash flow divided by your net investment, expressed as a percentage.

EXAMPLE:

If the net cash flow from a property is $10,000, and the cash invested in the property is $100,000, then the Cash on Cash return is calculated to be 10% ($10,000/$100,000).  The net investment in property is the cost of the property less the amount you borrowed.

A way to view this ratio is to compare it to a return of a certificate of deposit.  You deposit money in the bank and the bank pays you an annual return, say 5%.  The 5% is the Cash on Cash ratio. 

Please note that the Cash on Cash return does not include property appreciation which is a non-cash flow item until the year of sale.  So therefore, if you are evaluating a property on a long-term basis, you need to focus more on the annual cash flow as it relates to your investment, and focus less on property appreciation.

 

 


Douglas Rutherford, CPA

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