The term cash on cash return is used in investment to indicate the ratio of income to investment especially in real estate. It is given as a percentage and used to estimate the expected profit from the investment. It can be used as a basis for decision making to establish if the venture is profitable or not. It gives a quick idea of the expected returns. The estimates are confirmed later with in-depth analysis and calculations.
Some of the investors have used the formula to identify if a property is overpriced. By applying it in a calculation, an investor can judge if the returns promised or indicated are realistic. This will inform the decision to buy or not. It can tell instant equity of the property without having to rely on professional valuation.
An example is a property whose value is given at 1.2M dollars with a down payment of 300,000. The amount of rent collected from every month is given at 5,000 dollars. When calculating the percentage, you will be required to take the income of the entire year, which is 60,000 and divide it by the annual investment of 300,000. This will give you a figure of 20 percent which is your annual return on investment.
Some of the short comings of using this method include calculation using the amount before tax. There are tax obligations for each investment environment and they must be factored. These obligations shape the decisions of investors. The taxes are deferred through capital cost allowance in some cases.
During calculations, other property factors need to be considered. Properties appreciate and depreciate in value. Consideration of capital returns gives an erroneous figure. The investment signal given is not very accurate and may cause unrealistic expectations. Rent collection is used to fulfill other obligations before profits can be calculated.
The formula used to calculate the income has not factored potential risks associated with the investment. They include economic factors like inflation, natural calamities and unforeseen occurrences. Such situations have a direct impact on your investment and will determine how much you get in the long run.
Cash on cash return gives figures that are based on a simple percentage that is not always the focus of investors. The most attractive figures for investors are given in form of compound interest. This will make the figure more realistic and accurate. There are possible losses even in the property market and the value depreciates with time. The formula is useful when looking for an estimate figure.
Some of the investors have used the formula to identify if a property is overpriced. By applying it in a calculation, an investor can judge if the returns promised or indicated are realistic. This will inform the decision to buy or not. It can tell instant equity of the property without having to rely on professional valuation.
An example is a property whose value is given at 1.2M dollars with a down payment of 300,000. The amount of rent collected from every month is given at 5,000 dollars. When calculating the percentage, you will be required to take the income of the entire year, which is 60,000 and divide it by the annual investment of 300,000. This will give you a figure of 20 percent which is your annual return on investment.
Some of the short comings of using this method include calculation using the amount before tax. There are tax obligations for each investment environment and they must be factored. These obligations shape the decisions of investors. The taxes are deferred through capital cost allowance in some cases.
During calculations, other property factors need to be considered. Properties appreciate and depreciate in value. Consideration of capital returns gives an erroneous figure. The investment signal given is not very accurate and may cause unrealistic expectations. Rent collection is used to fulfill other obligations before profits can be calculated.
The formula used to calculate the income has not factored potential risks associated with the investment. They include economic factors like inflation, natural calamities and unforeseen occurrences. Such situations have a direct impact on your investment and will determine how much you get in the long run.
Cash on cash return gives figures that are based on a simple percentage that is not always the focus of investors. The most attractive figures for investors are given in form of compound interest. This will make the figure more realistic and accurate. There are possible losses even in the property market and the value depreciates with time. The formula is useful when looking for an estimate figure.
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