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.
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.
There are crucial property factors that are not considered by the formula. They include appreciation and depreciation. The calculation considers capital returns as income which is erroneous. It gives a deceptive figure and raw assumptions that are not the real situation on the ground. There are other obligations to fulfill with rent collection before counting profits.
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 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.
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.
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.
There are crucial property factors that are not considered by the formula. They include appreciation and depreciation. The calculation considers capital returns as income which is erroneous. It gives a deceptive figure and raw assumptions that are not the real situation on the ground. There are other obligations to fulfill with rent collection before counting profits.
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 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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