I have this model where the going in cap rate is 3.95% (unlevered cash on cash), however when I apply debt at a 2.50% interest rate (25 year am, 65% LTV), the levered cash on cash is 1.23% in year 1.
Shouldn't the levered cash on cash be higher then the going in cap rate because the going in cap rate > interest rate? FYI i am including principal repayments into my cash flow, so perhaps thats why the levered cash on cash is so low. Are principal part of the payments typically not included? wtf is going on and why has my finance degree failed me
Cap rate = NOI (before debt) / Value
Cash on cash = Free Cash Flow (after debt) / Outstanding Capital
Yes but shouldn't my cash on cash be higher then going in cap rate? If the interest rate of the loan is lower then the going in cap, it should have a positive lever effect for higher returns.
Look up what a debt constant is. Your rate is far less than what you pay annually e.g. an interest rate of 3.5% has a debt constant of 5.5%. You’re paying 5.5% of your loan amount annually. So unless you’re buying a 5.6% cap property you are negatively levered, or unless you use interest only
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