I'm glad I saw this thread. I can see how this subject gets easily confused. I've been looking at note returns, with a focus on IRR. However I am also looking long term and calculating how compounding will affect my retirement given certain basic cash on cash returns.
Speaking strictly about note income, it's my understanding that IRR accounts for the time value of money including principal and interest portion of the payment. Naturally the amortization schedule is not constant with regards to how much of the payment is principle and how much is interest.
So, I'd like to ask if my assumptions are correct using the above example. For a basic cash on cash return here is my understanding of the above example. Please correct me if I'm wrong or a better more efficient way to do this.
Using above example:
Purchase Price = $22,900
Gross Payments (annual) = $3,516
Annual Servicing Fee = $180
Net Payments (annual) = $3,336
Payment Yield = (3,336/22,900) = 14.57%
Life Time Payments = $104,601
Life Time Service Fee = $5,355
Life Time Net Payment = $99,246
$99,246 - $22,900 = $76,346 actual profit over life of loan
So taking $76,346 and dividing over 357 periods we get $213.85
$213.85 x 12 months = $2,566.25 per year total PROFIT return. I realize this is not even each year and is only an overall return if the loan follows to the end of amortization.
So $2,566.25 per year / the purchase price of $22,900 = 11.20% cash on cash return.
Is this a correct assumption, or is there a better way to figure out cash on cash? I realize IRR is more important. The reason I'm looking at cash on cash is to do projections in a compound interest calculator over long periods of time to see what my actual cash flow PROFIT will be.
Is this correct or is there a better way to do this?
Thank you!
Josh
