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Real Estate Deal Analysis & Advice Cumulative Cash on Cash Return - Theoretically SpeakingJason Merchey
I'm not the best finance mind. I got a calculator called Rental Valuator. I like it. It's a teenie bit above my head, but I think I get it. My question is, when I plug in a property purchased today for 25% down, 30 year term, fixed interest, 60% income/40% expenses, appreciating at 3% a year over 30 years, vacancy of 4%, and rent and costs of doing business rising concordantly (3% annually), I get a "cumulative cash on cash return" of 1000% before taxes. I take that to mean the value of the property in regard to cash flow and appreciation and debt paydown VS. my 25% down payment doubled (from 0% to 100%) then doubled again (from 100% to 200%) and so on to a factor of 10, which basically beats the pants off of say, investing that $50,000 in stocks and seeing a 5% per year increase, for a total of 150%, or a factor of 1.5. My question is, am I misinterpreting something, or do leveraged returns really skyrocket like that even in a gently-appreciating housing market? It sounds almost too good to be true. My second question is, it would seem that any rent increases of 3% a year would be cancelled out by expenses increases of 3% a year (thus causing me to feel skeptical). Are those two percentages equal, in other words, will they cancel each other out, or do I have that wrong? You can't boast increasing rents 3% a year for 30 years if your insurance and roof and HVAC and so on all cost 3% more per year. Also I will have paid more than $100k to the bank just to finance it, so there goes that money. Also is it safe to assume that over 30 years one will see a doubling in property values, or is there something wrong with that assumption? As far as the ease of ownership, yes, there is a lot of management and upkeep, and yes missed payments can lead to a foreclosure, but if I go all 30 years and can sell the $200k property that I paid $50,000 for up front for $400k, it seems like a bombshell of an investment. Well, minus taxes on income and taxes on the sale. Am I making any mistakes in my understanding? How do you calculate cumulative return?If the standard return over one period is R 1 and the standard return over a second period is R 2 then the cumulative return over both periods, R c, is (1 + R 1)(1 + R 2) – 1 = R c. The cumulative return is sometimes referred to as the total return.
What is cumulative cash return?What Is Cumulative Return? A cumulative return on an investment is the aggregate amount that the investment has gained or lost over time, independent of the amount of time involved.
How do you calculate cumulative cash flow?Start by calculating Net Cash Flow for each year: Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1. Then Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3, etc.) Accumulate by year until Cumulative Cash Flow is a positive number: that year is the payback year.
How do you calculate cumulative return from annual return?Related: Your Guide to Careers in Finance.. (1 + Return) ^ (1 / N) - 1 = Annualized Return.. N = number of periods measured.. To accurately calculate the annualized return, you will first have to determine the overall return of an investment. ... . (1 + 2.5) ^ 1/5 - 1 = 0.28. ... . Related: 16 Accounting Jobs That Pay Well.. |
How is cumulative cash return calculated?
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