Cash-on-Cash Returns in Industrial Real Estate
A cash-on-cash return is a quick and easy way to determine how profitable an industrial investment can be for you. Use our free calculator.
Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!A cash-on-cash return calculation, also known as a cash yield, is a relatively easy way for an investor to determine how profitable an investment could potentially be. Often compared to a return on investment, or ROI, calculation, cash-on-cash is different in that it only considers profits relative to paid investment costs. Appreciation, tax benefits, and many other variables are not included in cash-on-cash calculations.
Cash-on-Cash Return Calculator
Plug your figures into the calculator below. Read more on how the calculation works below.
The Calculation
Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Investment
Before you begin, first you must calculate your annual pre-tax cash flow for the property. This will include your gross potential rent and any other income, less your vacancy costs, operating expenses and mortgage payments for the year.
Once you have determined that, your total cash investment is simply the amount of direct capital you have put into the asset. If you purchased a $10 million industrial property with a down payment of $2 million and $8 million in acquisition financing, your total cash investment would be $2 million, not $10 million.
Let’s use the $10 million industrial acquisition mentioned above as an example to illustrate how the formula works.
Your newly acquired 250,000-square-foot warehouse has a gross potential rent of $750,000 per year, plus an additional $10,000 per year in parking revenue, so your income would be $760,000 per year. You calculate your vacancy costs at $20,000, operating expenses of $50,000, and mortgage payments annually equal $400,000, for a total of $470,000.
Annual Pre-Tax Cash Flow = $760,000 - $470,000 = $290,000
Cash-on-Cash Return = $290,000 ÷ $2 million = 14.5%
Dividing the $290,000 by the $2 million cash invested gives you a cash-on-cash return of 14.5%.
Related Questions
What is cash-on-cash return in industrial real estate?
Cash on cash return is a rate of return commonly used in industrial and commercial real estate finance. It is calculated by looking at the amount of cash you invested compared to the amount of income you received over a specific time period, generally one year. Simply, cash on cash return is calculated by dividing annual income by total investment. Cash on cash return is also called the equity dividend rate in certain cases. This is one of the most common return systems that can be found in the real estate industry.
To calculate the cash on cash return, an investor first determines the net income from a specific property for the year. They can do this by determining the gross income the property generated and then subtracting any operating costs (and in the event there is a commercial mortgage, debt service as well). Then, they should divide the net income by the total cash spent for the property. The resulting figure, once converted to a percentage, is the cash on cash return.
Cash on cash return can be calculated by using the following formula:
Cash on Cash Return= Annual Dollar Income / Total Dollars Invested
How is cash-on-cash return calculated in industrial real estate?
Cash on cash return in industrial real estate is calculated by dividing the annual income by the total investment. This calculation is also referred to as the equity dividend rate. To calculate the cash on cash return, an investor first determines the net income from a specific property for the year. They can do this by determining the gross income the property generated and then subtracting any operating costs (and in the event there is a commercial mortgage, debt service as well). Then, they should divide the net income by the total cash spent for the property. The resulting figure, once converted to a percentage, is the cash on cash return.
More information can be found in the following sources:
What factors affect cash-on-cash return in industrial real estate?
The cash on cash return for industrial real estate is affected by the same factors as any other type of commercial real estate. These include the amount of leverage used to finance the property, the net operating income generated by the property, and the amount of cash invested in the property. Leverage is particularly important, as it determines the amount of cash required to enter into a commercial real estate investment (higher leverage = you can buy more with less money).
Income taxes, possible risks, the amount of money to be borrowed, and the various financing alternatives available are also key components to consider before making a decision. It is important to study these factors thoroughly prior to making any decision.
For more information, please see the following sources:
What is a good cash-on-cash return for industrial real estate?
The cash-on-cash return for industrial real estate can vary greatly depending on the financing structure and the amount of leverage used. Generally, a good cash-on-cash return for industrial real estate is between 8-12%.
To calculate the cash-on-cash return, you need to determine the net income from the property for the year. This can be done by subtracting any operating costs and debt service from the gross income generated by the property. Then, divide the net income by the total cash spent for the property. The resulting figure, once converted to a percentage, is the cash-on-cash return.
The formula for calculating the cash-on-cash return is:
Cash on Cash Return = Annual Dollar Income / Total Dollars Invested
You can read more about cash-on-cash return in commercial real estate here and about equity multiple here.
How can investors maximize cash-on-cash return in industrial real estate?
Investors can maximize cash-on-cash return in industrial real estate by leveraging their investment. Leverage allows investors to purchase more real estate with less money, thus increasing their cash-on-cash return. For example, if an investor spends $2 million buying a piece of property, their cash-on-cash return will be far lower than if they borrows $1.6 million and only spend their cash on a $400,000 down payment and closing costs. Additionally, investors should consider the net income of the property, operating costs, and debt service when calculating cash-on-cash return.
Sources:
What are the risks associated with cash-on-cash return in industrial real estate?
The risks associated with cash-on-cash return in industrial real estate are similar to those associated with other types of commercial real estate investments. If the projected net operating income decreases substantially, the owner may be liable to make principal and interest payments or even, at some point, pay back the entire loan prematurely. Additionally, income taxes, possible risks, the amount of money to be borrowed, and the various financing alternatives available are all key components to consider before making a decision.
For more information, please refer to the following sources: