Investors use a variety of methods to gauge the profitability of their investments. One of these is the cash-on-cash return. This is something that they can project once they start looking into the income that a property will bring in. They have to balance this with the cost of the property.
The cash-on-cash return is a fixed-term look at how profitable the investment is. The monthly cash income is compared to the amount of the loan payment for that month on the property. All of the calculations in this process are done using pre-tax figures.
Why is cash-on-cash return important for commercial real estate investments?
Investors want to know if the properties they purchase are performing as expected. The issue with this is that it’s not a good idea to look at the numbers from the date the investment was made. Using the cash-on-cash return method enables them to look at how the investment performance is doing right now compared to how it performed in the past.
Another useful aspect of the cash-on-cash return method is that it can show the potential profit margin for the investment in the future. Many transactions that include long-term debt borrowing use this method because it accounts for the differences in the return on investment between a property that used a normal purchase and those that include long-term debt borrowing.
Making sure you thoroughly understand the commercial real estate venture you’re entering into is crucial for success. Read through all documents and do your due diligence on the property you’re investing in so you can make sound decisions about the investment.