Sample interview questions: Can you explain the concept of cash-on-cash return and its significance in real estate analysis?
Sample answer:
- Introduction
Cash-on-cash return is a fundamental metric used in real estate analysis to evaluate the profitability of a property investment. It measures the annual cash flow generated by a property relative to the total amount of cash invested.
- Calculation
Cash-on-cash return is calculated as follows:
Cash-on-Cash Return = (Annual Net Cash Flow / Total Cash Investment) * 100
- Significance
Cash-on-cash return is a key indicator of a property’s cash flow performance, which is crucial for real estate investors. A higher cash-on-cash return generally indicates a more profitable investment. It is particularly useful for comparing different properties and making investment decisions.
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Factors Affecting Cash-on-Cash Return
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Rental Income: The amount of rental income generated by the property is a primary factor affecting cash flow. Higher rental income leads to a higher cash-on-cash return.
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Operating Expenses: Operating expenses, such as property taxes, insurance, maintenance, and utilities, reduce the net cash flow and, consequently, the cash-on-cash return.
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Financing Costs: Mortgage interest and other financing costs also reduce cash flow and impact the cash-on-cash return.
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Appreciation: Appreciation in the property’s value can increase the overall return on investment, but it does not directly impact the cash-on-cash return.
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Using Cash-on-Cash Return for Investment Decisions
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Comparison of Investment Opportunities: Cash-on-cash return enables investors to compare different pro… Read full answer
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