Posted by John B. Corey Jr. on September 09, 2005 at 01:05:01:
Do you know how to compute the return on the property if it increases in value from when you purchased it to when you sell it (ignoring transaction costs).
Most people would do the following to get a crude version.
Purchase at $50K. Sell in a year for $60K. Hence they made $10K profit.
If they put in $50K and sold for $60K then they made $10K or 20% on their investment.
Now lets assume they put 20% down and finance the balance of the $50K purchase. Same sale price.
The investor only put in $10K and they walked away with $20K after paying off what they borrowed. That would be a 200% cash on cash return. Broadly the same as when a company talks about their return on equity. The use of leverage means that you cash contribution is smaller so a much higher return cash on cash.
If you put zero cash in (100% debt financed), what would be the cash on cash return?
John Corey
Chelsea Private Equity LLC