Question

A property is purchased for $10,000. An 70% Interest-Only Loan is secured at 6% interest. The first-year income is $100, and the rent grows at 4% per year, and the property is sold at the end of the 5th Year for $4,000. What is the leveraged Cash on Cash return?

Answer 1

Sol :

Property purchase value = $10,000

70% loan = 70% of $10,000 = $7,000 (PV)

Interest (r) = 6% per year

Period (n) = 5 years

Future value (FV) at the end of 5th year = PV (1+r)^n

FV = 7000 (1+6%)^5

FV = 7000 (1.06)^5

FV = $9367.58

Interest paid on loan = FV - PV

Interest paid on loan = $9367.58 - $7000 = 2367.58

Future value of rent,

Rent = $100

Interest (r) = 4% per year

FV of rent = Present value (1+r)^n-1/r

FV of rent = 100 (1+4%)^5-1/4%

FV of rent = 100(1.04)^5-1/0.04

FV of rent = $541.63

Property sold for = $4000

Leveraged Cash on Cash return = Property sold value - Interest paid on loan + FV of rent

Leveraged Cash on Cash return = $4000 - $2367.58 + $541.63

Leveraged Cash on Cash return = $2174.05

Therefore leveraged Cash on Cash return on the property is $2174.05