CASH ON CASH EQUITY RATE OF RETURN
When you look at the whole gamit of investments available, it can sometimes be very confusing trying to figure out which one would work best for you. There are so many different formulas to analyze annual return on investment.
When it comes to real estate many investors rely on Cash On Cash Equity Rate of Return to figure out how good a property might be. Let's break it down to show you how it works. If you buy a rental property for $350000 and put down 20 per cent, your cash invested (CI) is $70000.
If you rent the property for $1500 per month, your annual cash flow is $18000. Minus your income tax paid your Cash Flow After Taxes (CFAT) is $11700.
Let`s say your annual principal reduction (PI) on the mortgage is $6000.
Let`s be conservative and call your annual equity appreciation (EA) one per cent. On $350000 that would equal $3500.
To get a percentage of your Cash on Cash Equity Rate of Return you do the following: Add CFAT, PI and EA together and divide this total by the cash you have invested in the property.
If you divide $21,200 (CFAT + PI + EA ) by your $70000 investment you get 30 per cent. So your annual return on investment equals 30 per cent.
Try and find this kind of return on the stock market with its volatility of late.
If you have any questions regarding this real estate investment formula feel free to contact me.
I hope you find it of some value.