Cash on Cash Return

             Cash on Cash Return is a percentage that measures the return on cash invested in an
 
             income producing property.  It is calculated by dividing before-tax cash flow by the

             amount of cash invested and is expressed as a percentage.  If before-tax cash flow for

             an investment property is equal to $15,000 and our cash invested in the property is

             $100,000, cash on cash return is equal  to 15%.

 

                                            Before-Tax Cash Flow                     $15,000
                 Cash on Cash =  ----------------------------  X  100  =  ------------- X  100   = 15%
                                                 Cash Invested                              $100,000

              The following shows how before-tax cash flow is derived.

 
                     Gross Income                                   54,500
                         Less Vacancy Amount                    2,500
                     Gross Operating Income                  52,000
                         Less Operating Expenses            17,000 
                      Net Operating Income                      35,000
                         Less Annual Debt Service            20,000
                      Before-Tax Cash Flow                     15,000

             Cash on Cash Return is used to evaluate the profitability of income producing

             properties.  It can be useful when comparing investment properties, but is just

             one of many analysis tools.  It only considers before-tax cash flow and doesn't

             take into account an investors individual income tax situation and it doesn't consider

             the wealth building potential of a property via appreciation.  A property in one area

             of a city may have a better Cash on Cash Return then a property in another

             location, but it may not appreciate as fast because of it's location.

            One location may be more desirable than the other.

 Tien and Jim 

Your Real Estate Partners