March 8th, 2010 • 16:03
calculating cash-on-cash on a real estate development project?
How can I calculate cash-on-cash return for a real estate development project if I have the pro forma (finds the net operating income) and a development budget. What would the formula be? My book doesn’t give a good explanation of this and it is for a homework assignment. I also have the overall return on cost calculated.
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Mar 8th 2010 • 17:03
by mjazenko
Typically, cash on cash return is really cash flow before taxes or in layman’s terms, net operating income before taxes. The key words here are BEFORE taxes. In the case specified, you take the amount of money that the project would generate then deduct all your costs and divide that figure by your initial investment. So, if the development is to generate $4 Million before taxes, take that figure and divide it by your initial investment of say, $500,000 would equal a return of 12.50% BEFORE TAXES. The 12.50% represents the cashflow in relation to the initial investment or equity.
Another way to calculate cash on cash return is to take the after tax cash flow plus the debt reduction (equity build up) and divide that by your initial investment. For example, Project A has an after tax cashflow of say, $75,000, a debt reduction due to principle payments on the mortgage amounting to $1,000 and initial iinvestment of say, $300,000.
Modified cash on cash return = ($75,000+ $1,000) /$300,000
= .25333 or 25.33%
Hope this helps. If you have anymore real estate related questions, send me an email with the words ‘real estate help’ in the subject line.