What Is The Formula To Calculate A Loan Payment Cash On Cash Return, The Formula And Calculation

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Cash On Cash Return, The Formula And Calculation

Cash-on-Coin (CoC) provides an easy way for real estate investors to compare the benefits of similar income-producing properties or compare them to another investment opportunity quickly.

CoC, however, is not a powerful tool for measuring the profitability of a rental income property and currently receives less attention in real estate investment analysis than it did years ago.

Another shortcoming is that money in money returns do not take into account the time value of money. The return on cash flow should be limited to measuring the property’s income for the first year’s cash flow and not the next year’s cash flow.

However, money in cash is not without legality and still provides experienced investors and beginners in real estate the benefit that is often caused by its popularity.

The return on CoC measures the ratio between the expected cash flow in the first year to the initial amount of capital investment made by the real estate investor to purchase the rental property. Therefore, CoC is often expressed as a percentage.

“First year cash flow” (or annual cash flow) is the amount of cash that a property is expected to generate in the first year of operation. “Initial investment” (investment fee; sometimes called acquisition cost) is the total amount of money invested including the down payment, loan notes, escrow and title fees, appraisal and inspection costs.

Okay, let’s start with an example and then do some math.

Let’s say you’re interested in buying a property with six units that pay $1,000 a month each. He estimates operating costs for the first year to be $28,800. You plan on a new mortgage with a $126,000 down payment, a credit score of $2,940, and a monthly payment of $1,956. He estimates that your closing costs (escrow, title, inspection, and appraisal fees) will be $2,100.

Formula: Cashflow / Investments = Cash on capital return

In this case, you will need to do five calculations (to see CashFlow and Investments) before counting the cash.

  1. Annual Rental Income: (6 units x $1,000) x 12 = $72,000

  2. Net Operating Income (NOI; income less expenses): $72,000 – 28,800 = $43,200

  3. Annual Debt Service (mortgage payment): $1,956 x 12 = $23,472

  4. Annual CashFlow (operating income less cash flow): $43,200 – 23,472 = $19,728

  5. Capital investment (down payment + points + closing costs): $126,000 + 2,940 + 2,100 = $131,040

Calculation: (Annual CashFlow / Cash Investment = Cash in Cash Return) $19,728 / $131,040 = 15.06%

Now that you know that this particular investment opportunity produces a return of 15.06% CoC, you can compare it to similar properties, or other investments such as T-Bill value, and decide whether or not to proceed with the purchase.

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