Hi Steve – like many on this forum, I read your book 0-130 properties more than a decade ago, and I had a question regarding ‘Cash on Cash Return’ calculation.
Can this same Cash on Cash Return calculation be utilised and be useful in situations where the annual cashflow generated from an investment property is negative?
For example, let suppose the property produces annual cashflow of $-10,000 and lets assume initial purchase/closing costs of purchasing the property was $46,000.
This means according to the calculation, the CoC rate would be -$10,000 divided by $46,000 which equals -0.22 which equates to -22%
Does this -22% still apply, and if so, what meaning can we put to it?
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- This topic was modified 3 weeks, 4 days ago by PropDir.
Hi all – can someone else help with my question – doesn’t need to be Steve.BennyModerator@bennyJoin Date: 2002Post Count: 1,416
“Does this -22% still apply, and if so, what meaning can we put to it?”
I would think it does apply, and indicates a 22% loss. I don’t know of any more complicated way to view it, but would be interested to hear from others on this too (especially if my answer is wrong, or incomplete).
BennyajayayyarParticipant@ajayayyarJoin Date: 2005Post Count: 176
Can any others on the forum comment on what the -22% indicates and are we able to establish some meaning to it?Steve McKnightKeymaster@stevemcknightJoin Date: 2001Post Count: 1,763
Sorry for the delay in replying…
Absolutely, positive or negative, the result is the result.
The -22% means that for every dollar invested in the deal (your cash down), you will need to find an extra 22 cents per annum to feed the deal and keep it alive.
Be aware that percentages are really for comparison, but as my friend Marty Ayles says, you bank dollars, not percentages.
With that in mind, the bigger question in my mind is where will the $46k needed to plug the hole come from?
Finally, be mindful that any deal with negative cashflow (that is not temproary, such as curing a vacancy), must be a growth deal. And to be effective, the investment’s unrealised growth must exceed realised cash outflow. And even if it is, it will be profitable on paper, and a cash crocodile in real life.
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