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Testimonials |
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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.
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