Cash on cash return is an investment term that gives the percentage ratio of the money you get before tax to your total investment. It is only used on investment that is expected to give profit. The formula is used as a quick test to set the ground for further review or analysis of investment. It can tell an investor if the returns are satisfactorily high.
Investors use this form of calculation to tell if the figure quoted on a property is good value for money. The formula is simple and can tell an investor if there is a realistic possibility of making good money from the venture. This will drive you to buy a property or look elsewhere. It gives the instant equity of the property in question.
An example is a property whose value is given at 1.2M dollars with a down payment of 300,000. The amount of rent collected from every month is given at 5,000 dollars. When calculating the percentage, you will be required to take the income of the entire year, which is 60,000 and divide it by the annual investment of 300,000. This will give you a figure of 20 percent which is your annual return on investment.
Some of the short comings of using this method include calculation using the amount before tax. There are tax obligations for each investment environment and they must be factored. These obligations shape the decisions of investors. The taxes are deferred through capital cost allowance in some cases.
The formula used to arrive at the figure does not consider appreciation and depression effects. Money returned as capital should not be considered as income. This means that the figures given through this calculation are deceptive and could mislead investment decisions. They are raw assumptions that do not give the actual situation to investors. The assumption made is that all money gotten from the investment is considered as income on the part of the investor.
There are inherent risks in every environment where investment is involved. Natural calamities and other tragedies affect the value of property. Inflation and other economic forces affect the decision to invest and the value of property. Such factors are absent during calculation yet they are crucial to any investor.
Cash on cash return bases its figures on a simplistic percentage that is not the main concern for investors. Most investors are attracted by compound interests which give better returns over time. Calculating the income after taxation gives a more realistic figure. It is also necessary to consider depreciation and expected losses. The formula is however useful when making an initial assessment to get a rough idea.
Investors use this form of calculation to tell if the figure quoted on a property is good value for money. The formula is simple and can tell an investor if there is a realistic possibility of making good money from the venture. This will drive you to buy a property or look elsewhere. It gives the instant equity of the property in question.
An example is a property whose value is given at 1.2M dollars with a down payment of 300,000. The amount of rent collected from every month is given at 5,000 dollars. When calculating the percentage, you will be required to take the income of the entire year, which is 60,000 and divide it by the annual investment of 300,000. This will give you a figure of 20 percent which is your annual return on investment.
Some of the short comings of using this method include calculation using the amount before tax. There are tax obligations for each investment environment and they must be factored. These obligations shape the decisions of investors. The taxes are deferred through capital cost allowance in some cases.
The formula used to arrive at the figure does not consider appreciation and depression effects. Money returned as capital should not be considered as income. This means that the figures given through this calculation are deceptive and could mislead investment decisions. They are raw assumptions that do not give the actual situation to investors. The assumption made is that all money gotten from the investment is considered as income on the part of the investor.
There are inherent risks in every environment where investment is involved. Natural calamities and other tragedies affect the value of property. Inflation and other economic forces affect the decision to invest and the value of property. Such factors are absent during calculation yet they are crucial to any investor.
Cash on cash return bases its figures on a simplistic percentage that is not the main concern for investors. Most investors are attracted by compound interests which give better returns over time. Calculating the income after taxation gives a more realistic figure. It is also necessary to consider depreciation and expected losses. The formula is however useful when making an initial assessment to get a rough idea.
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