Before making an investment, it’s important to evaluate the potential profitability of the property. Our team uses several techniques to help our clients weigh potential options.
Cash on Cash
The cash on cash return of an investment is a calculation of the initial investment compared to excess cash generated by the property each year. The cash on cash return is expressed as a percentage.
This calculation usually does not take into account profits from the sale of the property, focusing instead on the extra income gained from the operation of the property alone.
For example: You invest $100,000 to purchase a property. In the first year, after subtracting out the cost of upkeep and operating the property, you make $10,000 in income. The cash on cash return for that first year is 10%.
The equity multiple is a simple number to express how much the initial investment makes back. An equity multiple of 1.00x means the investment broke even. An equity multiple of 1.50x means you earned back your initial investment, plus 50% more. A number lower than 1.00x means you lost money. This calculation does take into account the sale of the property.
For example: You invest $100,000 to purchase a property. In the first year, you make $10,000 in extra cash. However, in year two, you only gain $5,000 from operating the property.
You decide to sell the property for $115,000. Adding your profits from year one and year two ($10,000 and $5,000, respectively), you end up with $130,000 in cash over the course of the investment. Compared to the $100,000 investment you made, you have an equity multiple of 1.30x.
Internal Rate of Return
A popular investment evaluation technique is called the Internal Rate of Return, or IRR. The IRR calculates how much money the investment will make each year, taking into account that the value of money changes over time. The IRR is a more nuanced calculation. It does include the eventual sale of the property and averages the profits into a percentage of the initial investment.
Download All Three Calculators Today
Royal Empire Realty will provide you all of these calculators free of charge! Our calculators will help you estimate what you’d make in the first few years after the purchase and over the lifetime of the investment.
We want you to take the first step in your investment journey. To receive your complimentary calculators, please fill out the form below. We will send your these tools – no strings attached.
We do hope you’ll consider Royal Empire Realty as your guide in your future investment journey. We would love to help you build your own Empire, one property at a time.