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.
The formula estimates if the amount demanded by an agent or the property owner indicates its real value. It is a rough estimate to test the face value of a property. An investor will establish if the rate at which the property generates income is satisfactory. He can then buy or look for an alternative. It is used to establish the equity of a property.
In a real case scenario, an agent may demand 1.2M dollars for a property. The down payment to be made is set at 300,000dollars. Expected rent collection from the property is five thousand dollars. The total for the whole year will be 60,000 dollars. To calculate the rate of returns, you will divide 60,000 by 300,000. This gives you 20 percent. It means that your investment will give you returns at 20 percent per year.
The calculations are based on raw figures obtained from an income flow before tax. Such figures do not represent the real situation because each investor has individual tax obligations. These obligations influence investment decisions made regarding any property. Some investors defer the taxes through the capital cost allowance.
The formula used to arrive at the figure does not consider appreciation and depression effects. Money returned as capital should not be considered as income. This means that the figures given through this calculation are deceptive and could mislead investment decisions. They are raw assumptions that do not give the actual situation to investors. The assumption made is that all money gotten from the investment is considered as income on the part of the investor.
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 bases its figures on a simplistic percentage that is not the main concern for investors. Most investors are attracted by compound interests which give better returns over time. Calculating the income after taxation gives a more realistic figure. It is also necessary to consider depreciation and expected losses. The formula is however useful when making an initial assessment to get a rough idea.
The formula estimates if the amount demanded by an agent or the property owner indicates its real value. It is a rough estimate to test the face value of a property. An investor will establish if the rate at which the property generates income is satisfactory. He can then buy or look for an alternative. It is used to establish the equity of a property.
In a real case scenario, an agent may demand 1.2M dollars for a property. The down payment to be made is set at 300,000dollars. Expected rent collection from the property is five thousand dollars. The total for the whole year will be 60,000 dollars. To calculate the rate of returns, you will divide 60,000 by 300,000. This gives you 20 percent. It means that your investment will give you returns at 20 percent per year.
The calculations are based on raw figures obtained from an income flow before tax. Such figures do not represent the real situation because each investor has individual tax obligations. These obligations influence investment decisions made regarding any property. Some investors defer the taxes through the capital cost allowance.
The formula used to arrive at the figure does not consider appreciation and depression effects. Money returned as capital should not be considered as income. This means that the figures given through this calculation are deceptive and could mislead investment decisions. They are raw assumptions that do not give the actual situation to investors. The assumption made is that all money gotten from the investment is considered as income on the part of the investor.
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 bases its figures on a simplistic percentage that is not the main concern for investors. Most investors are attracted by compound interests which give better returns over time. Calculating the income after taxation gives a more realistic figure. It is also necessary to consider depreciation and expected losses. The formula is however useful when making an initial assessment to get a rough idea.
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