Real estate math question
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(Senior Chimp, 21
Points)
on 7/28/11 at 4:27pm
If you buy a property with 50m equity and 50m debt. 1st year NOI is 5m so you have a 5% cap rate.
If the loan is 30 years with 5 year interest only, and the interest rate is 5%. Would your cash on cash return be equal to 5% ?





No. (If you're defining cash
No. (If you're defining cash on cash return as cash flow relative to the downpayment, which I believe is the only definition)
NOI minus interest expense plus depreciation and other cash adjustments will give you a certain number (i.e. the operating cash flow). Then, this number over the $50M equity investment will be your cash on cash return.
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Thanks Alex. But I think NOI
Thanks Alex. But I think NOI captures the expense already? So our before tax cash flow is just 2.5m (5m - 2.5m interest payment) and cash on cash is 2.5m/50m = 5%?
I got asked in an interview a similar question, with a project with 5% cap rate and 50% ltv. Interest rate was 4.5%. Will the cash on cash return be higher or lower than 5%?
I said it would be higher if I/O for the first year and lower than 5% if we amortize principal starting from 1st year, since loan constant will be higher than 5% with a 4.5% loan.
Beef up.
NOI is definitely
NOI is definitely pre-interest and pre-tax.
NI = after interest /
NI = after interest / depreciation. NOI = pre interest / depreciation
If $5M is your NOI then your COCR return during the interest only period would be 5%. If you are amortizing the loan from day 1 at 5%, you will see the COCR decrease. Your debt service would be something like $3.3M instead of $2.5M.
One year income = $5,000,000 less debt service of $2.5M for interest only period divided by the amount you invested (everything invested, not just down pmt. That includes costs / fees associated with acquisition) which is $50,000,000.
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