Is this a good Cash on Cash Return?

Question

We have an office building we'd like to buy and we have done a Cash on Cash Return calculation and come up with 23.5%.  It sounds great to us, but would like verification from more experienced people! :)

We also want to make sure we calculated it correctly.  Our formula was Annual Net Cash Flow (maintenance, taxes, insurance, P&I mortgage pymts) / Down Payment + Closing Costs (money out of pocket).

*We question whether to include P&I mortgage payments in the above formula.  Our thinking is this is money going out of our pockets.  (We realize we are building equity along the way with the Princ payment, but that is getting too deep for us right now.)

Here are the numbers, for those who want to double check my calc's:

$21600 (annual gross income), but $15,140 NOI - $10,440 annual P&I payments = $4700 Net Income

$18,000 down payment + $2000 closing costs = $20,000 Cash Out of Pocket

*This is an owner finance situation so we think $2000 is fair on closing costs.  Even if we're off a little on this number, we're still in the 20% ConC Ret ballpark.

Thanks SO much for anyone who takes the time to look at this!!

M.N.

Neal Bratton · Answer

Doesn't sound bad to me. Not sure what all you included in maintenance but might think about CapEx as well. Any big ticket items like A/C units, roof, etc. I think the numbers all look right. I like to keep all my P&I payments in the expense column also, and any equity is icing on the cake as far as annual returns.

Also BP has the calculators on the site. I would plug it into the rental property calculator to verify. It will also show you equity and factor in any growth you project.

I would say go for it!

-Neal

Marna N. · Answer

Thanks you Neal!  We think it sounds good too!

Marna