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.
Investors use this form of calculation to tell if the figure quoted on a property is good value for money. The formula is simple and can tell an investor if there is a realistic possibility of making good money from the venture. This will drive you to buy a property or look elsewhere. It gives the instant equity of the property in question.
An example is where an investor puts in 1.2 million dollars to purchase a property. He would be required to give a down payment of 300,000 dollars. With a monthly rent inflow of 5,000 dollars, the total for the entire year becomes 60,000 dollars. The percentage will be gotten by dividing 60,000 by 300,000. This will give a figure of 20. The value of return on investment is 20 percent in a 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.
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.
Investors use this form of calculation to tell if the figure quoted on a property is good value for money. The formula is simple and can tell an investor if there is a realistic possibility of making good money from the venture. This will drive you to buy a property or look elsewhere. It gives the instant equity of the property in question.
An example is where an investor puts in 1.2 million dollars to purchase a property. He would be required to give a down payment of 300,000 dollars. With a monthly rent inflow of 5,000 dollars, the total for the entire year becomes 60,000 dollars. The percentage will be gotten by dividing 60,000 by 300,000. This will give a figure of 20. The value of return on investment is 20 percent in a 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.
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.
About the Author:
You can try this out for more great information on real estate investing. For more on cash on cash return, read the full info here.
No comments:
Post a Comment