I'm sure if you've read my earlier posts you may be wondering when this will all end, but today we are finally getting to the good stuff: Returns. Why are you investing in commercial properties in Reading, PA? I'm guessing it's because you'd like to make some money. One measure of how much money you'll make on your investment is Cash on Cash Returns, also know as the Equity Dividend Rate. Your Cash on Cash Return is a measure of how many dollars you receive on an annual basis for every dollar that you invested. Let's continue the example of our small retail property in Reading, PA. We know that our NOI is $19,598 and we also know that our maximum loan amount is $137,186. We'll use Excel again to calculate our payment with the same assumptions for interest rate and amortization:
So subtracting our annual debt service payment from our NOI creates a cash flow of $7,324. Great! Or is it? Well now we have to look at how much we had to invest. To simplify things, we are going to ignore transaction costs at the moment. We're simply going to subtract our loan amount of $137,186 from our purchase price of $195,980, which means that we invested $58,794. We now calculate our Cash on Cash Return by dividing our annual cash flow of $7,324 by our investment of $58,324. So the Cash on Cash Return of our small retail property in Reading, PA is 12.46%. Please remember, that we have made several assumption in coming up with this number, and you'll have to make some assumptions of your own when actually analyzing investments. Now 12.46% is a great Cash on Cash Return in many markets, but I believe that it is a little low for Reading, PA. So at this point in the process we would compare the Cash on Cash Return for our retail property to that of other investment opportunities in our market.
To make our comparisons even better, we can also calculate the Internal Rate of Return (IRR) of our investments. I'll cover this in a future post. In the mean time, please feel free to comment with any questions up to this point. I'd love to know if these calculations are making sense to everyone, and if you are already analyzing your properties this way.
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