Cash on cash return is an investment term that gives the percentage ratio of the money you get before tax to your total investment. It is only used on investment that is expected to give profit. The formula is used as a quick test to set the ground for further review or analysis of investment. It can tell an investor if the returns are satisfactorily high.
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.
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.
The formula has some short comings that lead to inaccuracy. The figure used as income is inclusive of taxes. Each investment environment has tax obligations that must be met. Investors consider these regimes when making their decisions. Others opt to defer the taxes through capital cost allowance.
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.
There are inherent risks in every environment where investment is involved. Natural calamities and other tragedies affect the value of property. Inflation and other economic forces affect the decision to invest and the value of property. Such factors are absent during calculation yet they are crucial to any investor.
Cash on cash return percentages are based on simple interest calculations. Compound interests are more attractive to investors focusing on long term returns. Calculations after tax are more accurate because necessary adjustments have been made. These calculations have factored the important changes like expected losses and depreciation. They can be reliably used in complex investment 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.
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.
The formula has some short comings that lead to inaccuracy. The figure used as income is inclusive of taxes. Each investment environment has tax obligations that must be met. Investors consider these regimes when making their decisions. Others opt to defer the taxes through capital cost allowance.
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.
There are inherent risks in every environment where investment is involved. Natural calamities and other tragedies affect the value of property. Inflation and other economic forces affect the decision to invest and the value of property. Such factors are absent during calculation yet they are crucial to any investor.
Cash on cash return percentages are based on simple interest calculations. Compound interests are more attractive to investors focusing on long term returns. Calculations after tax are more accurate because necessary adjustments have been made. These calculations have factored the important changes like expected losses and depreciation. They can be reliably used in complex investment calculations.
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