Cash-on-cash Return

[Norberto Villanueva]

A retail broker for the majority of a 14 year career in real estate, I'm here to say all analyses are not created equal. Using the typical sales comparison approach to analyze a "3 bedroom 2 bath", forever home you know, where one creates a CMA based on what similar comparables have sold for to determine what it's worth, is a world away from analyzing the exact same investment property across the street, both for the very different buyers and the real estate professional involved.

Take cash-on-cash return. A brief snapshot in time, not only is it a concept that doesn't even come up with the typical home buyer, it also fails to provide a complete assessment of the situation. Because it is simply a ratio of the property's annual net cash flow and the initial investment, it does not consider the changes in equity that happen with amortization, one of the most salient aspects of investing in real estate, unlike what is obtained using a cash-on-cash return with equity analysis.

A reasonable client recently rejected a potential deal based on the disparities that exist between what an online buy and hold calculator showed for cash-on-cash return versus my analysis, which showed a 4% improvement in ROI by taking principle reduction into consideration. So what appeared to be a 6% cash-on-cash return in the calculator referenced was actually a 10% cash-on-cash return with equity.

There's an excellent article on the subject here: http://www.realestateanalysissoftwareblog.com/2011....

Taking property management, maintenance and other factors such as principle reduction into consideration, the models and pro formas we use to analyze potential real estate investments provide a cash-on-cash with equity analysis which, in my humble opinion, is a real world analysis of each and every investment scenario.

Happy investing.