Question

Assume you purchase a property for $2.5 million, using a $1.875 million mortgage loan that has an annual debt service payment of $150,000. If the property has an NOI of $210,000, determine the equity dividend rate (i.e., cash-on-cash return).

9.60 percent

10.42 percent

2.40 percent

8.40 percent

Answer 1

Solution:

Cash on cash return or equity dividend rate is calculated as :

(Net operating income (NOI) -  Debt service payments) / Equity Investment

Equity Investment is equal to purchase price of property less the amount of mortgage loan. In other words, equity investment is the amount of property financed by the investor himself.

So, Equity Investment = Purchase price of property - Mortgage Loan

= $ 2.5 million - $ 1.875 million

= $ 0.625 million

Now uing formula for cash on cash return = ($ 210,000 - $ 150,000 ) / $ 625,000

= $ 60,000 / $ 625,000 = 0.096 = 9.6%

So, correct answer is option A : 9.60%