Cash on Cash Return
- Thread starter LAndersen
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Its hardly @ breakeven point.
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Only the positive cash flow goes into the cash-on-cash return calculation, because that's the only part of the return that is in cash. You divide your yearly positive cash flow by your cash invested.
The other types of returns (equity paydown and appreciation) are not immediately in cash, so they go into your return on investmen calculation (also called internal rate of return).
Regards,
Michael
The other types of returns (equity paydown and appreciation) are not immediately in cash, so they go into your return on investmen calculation (also called internal rate of return).
Regards,
Michael
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[quote user=bizaro86]return on investmen calculation (also called internal rate of return).
IRR is another measure of return, and it does take cash-flow into consideration. IRR assumes a large cash-out-lay upfront followed by a series of payments, with usually a big one at the end on property exit. It is a more precise measure, and usually lower than a straight overall return divided by the number of years money is tied up.
The function @IRR can be used in Excel for that, with the first payment negative (i.e. cash out of your pocket into the property) and the rest, per year, usually positive.
Since cash-flow is frequently small, or held in reserves for upgrades or vacancies we usually show a total return, or one per year on average, also referred to as an annualized return. So if the overall return is 80% in 7 years the average or annualized return is about 13%, whereas the IRR might be below 9%.
IRR is another measure of return, and it does take cash-flow into consideration. IRR assumes a large cash-out-lay upfront followed by a series of payments, with usually a big one at the end on property exit. It is a more precise measure, and usually lower than a straight overall return divided by the number of years money is tied up.
The function @IRR can be used in Excel for that, with the first payment negative (i.e. cash out of your pocket into the property) and the rest, per year, usually positive.
Since cash-flow is frequently small, or held in reserves for upgrades or vacancies we usually show a total return, or one per year on average, also referred to as an annualized return. So if the overall return is 80% in 7 years the average or annualized return is about 13%, whereas the IRR might be below 9%.
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[quote user=ThomasBeyer] It is a more precise measure, and usually lower than a straight overall return divided by the number of years money is tied up.
Taking a total return over a number of years and dividing by the number of years invested is incorrect. The longer the term of the investment, the more wrong it will be. The actual IRR/ROI will always be lower than this measure for a multi-year investment, since compound interest is used.
Regards,
Michael
Taking a total return over a number of years and dividing by the number of years invested is incorrect. The longer the term of the investment, the more wrong it will be. The actual IRR/ROI will always be lower than this measure for a multi-year investment, since compound interest is used.
Regards,
Michael
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$100,000 Innitial Investment
YEAR 1 2 3 4 5
Cashflows or annualized returns
EOY1=$8,392
EOY2=$8,560
EOY3=$8,731
EOY4=$8,906
EOY4=$9,084 + Reversion of $113,500
[list type=decimal]
[*]straight overall return divided by the number of years money is tied up=(122,584-100,000)/100,000=22.584% in 5 years, so average or annualized return is about 4.52%
[*]
IRR for the above cash flows is 10.87%.
Cash on Cash Plus=?
Overall Return/Years=57.173%, so annualized return=11.43% which is less then IRR as said
[/list type=decimal]
I am not sure answers are correct except IRR which is correct. Kindly explain.
YEAR 1 2 3 4 5
Cashflows or annualized returns
EOY1=$8,392
EOY2=$8,560
EOY3=$8,731
EOY4=$8,906
EOY4=$9,084 + Reversion of $113,500
[list type=decimal]
[*]straight overall return divided by the number of years money is tied up=(122,584-100,000)/100,000=22.584% in 5 years, so average or annualized return is about 4.52%
[*]
IRR for the above cash flows is 10.87%.
Cash on Cash Plus=?
Overall Return/Years=57.173%, so annualized return=11.43% which is less then IRR as said
[/list type=decimal]
I am not sure answers are correct except IRR which is correct. Kindly explain.
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[quote user=OurRealtor](122,584-100,000)/100,000=22.584% you forgot the first 4 years of cash flow .. so it is higher
cash-on-cash plus is just a fancy way for cash-flow plus mortgage paydown (assuming no appreciation) .. it is usually referred to as ROE .. return on equity
cash-on-cash plus is just a fancy way for cash-flow plus mortgage paydown (assuming no appreciation) .. it is usually referred to as ROE .. return on equity
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[quote user=sjperren] "Cash on Cash Plus"
cash-on-cash plus is just a fancy way for cash-flow plus mortgage
paydown (assuming no appreciation) .. it is usually referred to as ROE
.. return on equity
cash-on-cash plus is just a fancy way for cash-flow plus mortgage
paydown (assuming no appreciation) .. it is usually referred to as ROE
.. return on equity
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[quote user=sjperren]What about "Cash on Cash Plus" as described in the REMA property analysis software, what does this signify? Is it the same as IRR?
As far as I'm aware "Cash on Cash PLUS" is only used by REIN (with a ` even). It's not an industry standard term. Mostly its just a way of fooling yourself into thinking that a poorly cash-flowing property is doing better than it really is.
As far as I'm aware "Cash on Cash PLUS" is only used by REIN (with a ` even). It's not an industry standard term. Mostly its just a way of fooling yourself into thinking that a poorly cash-flowing property is doing better than it really is.
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[quote user=JimWhitelaw]Mostly its just a way of fooling yourself into thinking that a poorly cash-flowing property is doing better than it really is.
This made me grin! A similar concept is also used by many of the very large real estate investors (huge REITs). They have amortizing mortgages on their buildings, but each year they refinance enough buildings that their new borrowings approximately equal their principal repayments. Thus, they have all of their net income as cash, and their debt levels stay the same, although it's distributed among different buildings. This is important for many of them that distribute that cash back to shareholders.
Regards,
Michael
This made me grin! A similar concept is also used by many of the very large real estate investors (huge REITs). They have amortizing mortgages on their buildings, but each year they refinance enough buildings that their new borrowings approximately equal their principal repayments. Thus, they have all of their net income as cash, and their debt levels stay the same, although it's distributed among different buildings. This is important for many of them that distribute that cash back to shareholders.
Regards,
Michael
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Yes, many (but not all) over-distribute their true cash-flow or also referred to as FFO (funds from operations)
Mortgage paydown is equity / profit ! But it is not (yet) cash.
Even RioCan admitted that if ALL investors took cash as distribution they could not sustain distributions with a 50% mortgage. But many REIT owners take units, instead of cash.
Cash is cash. cash comes from:
a) bank account
b) cash-flow of assets
c) occasional sale of assets
d) occasional re-fi of assets
a nice & sustainable model if pool of assets is large enough. Watch for true NAV though. Some private REITs disclosed NAV may not be the true asset value.
Mortgage paydown is equity / profit ! But it is not (yet) cash.
Even RioCan admitted that if ALL investors took cash as distribution they could not sustain distributions with a 50% mortgage. But many REIT owners take units, instead of cash.
Cash is cash. cash comes from:
a) bank account
b) cash-flow of assets
c) occasional sale of assets
d) occasional re-fi of assets
a nice & sustainable model if pool of assets is large enough. Watch for true NAV though. Some private REITs disclosed NAV may not be the true asset value.
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- Mar 25, 2011
- Messages
- 55
[quote user=ThomasBeyer]Yes, many (but not all) over-distribute their true cash-flow or also referred to as FFO (funds from operations)
Mortgage paydown is equity / profit ! But it is not (yet) cash.
Even RioCan admitted that if ALL investors took cash as distribution they could not sustain distributions with a 50% mortgage. But many REIT owners take units, instead of cash.
Cash is cash. cash comes from:
a) bank account
b) cash-flow of assets
c) occasional sale of assets
d) occasional re-fi of assets
a nice & sustainable model if pool of assets is large enough. Watch for true NAV though. Some private REITs disclosed NAV may not be the true asset value.
Mortgage paydown is equity / profit ! : Is it Equity divide by Profit? How REIT Distribute units? Can I take what I like or will REIT weigh and see my financial capability?
Mortgage paydown is equity / profit ! But it is not (yet) cash.
Even RioCan admitted that if ALL investors took cash as distribution they could not sustain distributions with a 50% mortgage. But many REIT owners take units, instead of cash.
Cash is cash. cash comes from:
a) bank account
b) cash-flow of assets
c) occasional sale of assets
d) occasional re-fi of assets
a nice & sustainable model if pool of assets is large enough. Watch for true NAV though. Some private REITs disclosed NAV may not be the true asset value.
Mortgage paydown is equity / profit ! : Is it Equity divide by Profit? How REIT Distribute units? Can I take what I like or will REIT weigh and see my financial capability?