Calculating Cash on Cash Return

[Matt Browning]

I'm using the Rental Property tool on BP, but I have a question on CoC return. I have around $15k in cash, and $305k available in my HELOC. When using the tool I put the HELOC funds in the downpayment, so the report assumes that the downpayment I'm making is cash. So when I see final cash flow, I have to subtract the debt service payment going to the HELOC. That's fine, but my deal only has around a 9% CoC return even before I'm paying for my HELOC debt service.

I guess my question when evaluating this deal, I'm probably only going to put $10k in cash in the deal and the rest will come from my HELOC. I'm assuming that I should still use the 9% as my CoC... but since I'm technically borrowing the HELOC funds my actual CoC would be exponentially higher since I only have $10k in actual cash in the deal. I'm looking at a commercial loan at a rate of 5.25% (5 year ARM), amortized over 25 years, and a floating HELOC rate of Prime - 1% (so still 3.75% at the moment). It's hard to see a clear picture since I have two sources of borrowing and they're at different rates.

Thoughts?

[Scott E.]

The draw from your HELOC is being used to acquire this asset. The HELOC payment is part of your debt for the deal.

You calculate your cash flow by taking your gross income, minus debt service and other expenses (including heloc payment).

Whatever cashflow is left you can compare to your $10k cash into the deal to determine your cash on cash return year 1.