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What’s a cash-on-cash return?

On Behalf of | Feb 10, 2018 | Commercial Real Estate

If you want to find a good deal on a commercial real estate property, it’s highly unlikely that the deal is simply going to fall right into your lap. You may need to really research to find a property that you can buy for a price that brings you high value. Fortunately, you can learn a variety of value testing metrics on the internet that apply to commercial real estate deals. One is known as the cash-on-cash return.

The cash-on-cash return is a way of evaluating whether a real estate deal was profitable. San Antonio investors will want to shoot for the highest cash-on-cash return possible in all of their real estate deals. Understanding how to calculate these returns is relatively simple.

If you need to take out a loan, the cash-on-cash return is important to your overall profit from the transaction. Imagine you hold a property for a year. You take out a $3,000,000 loan and use a down payment of $300,000 to secure the loan.

Over the course of the year, you spend $150,000 in loan payments and earn $50,000 in cash income from rents. At the close of the year, you sell the property for $4,000,000. To know your cash-on-cash return, you’ll look at how much cash you paid and how much cash you received. In this case, you would have paid out $450,000 cash and received $1,000,000 cash. Your cash-on-cash return would be $550.

In order to negotiate the most profitable real estate deals, San Antonio residents will want to familiarize themselves with Texas state real estate law. Knowing the ins and outs of the law can help commercial real estate buyers ensure that they don’t run into costly legal battles as a result of investing in a piece of property.

Source: Investopedia, “Cash-on-Cash Return,” accessed Feb. 09, 2018