Trinety offers two methods to calculate cash on cash returns, enabling a comprehensive analysis of your net lease investments. You can choose to calculate returns based on:
Initial Capitalization:
This method focuses on the return on your initially invested capital, providing insights into the initial performance and profitability of your investment.
Current Equity Basis:
This approach calculates returns based on the current equity value, offering a current perspective on your investment's profitability.
These dual calculation methods are vital for a thorough understanding of both your initial returns and ongoing equity performance, addressing an often overlooked aspect of net lease investment analysis.
Example: Calculation Cash on Cash Return % Based on Initial Capitalization
This method determines the cash on cash return percentage using the initial Capital Investment. The Capital Investment is calculated as the initial Purchase Price of the property minus the starting balance of the loan. This focuses on evaluating the return generated from the capital invested at the outset of the purchase.
Purchase Price | $1,150,000.00 |
Initial Loan Amount | $772,000.00 |
Capital Investment | $378,000.00 |
Annual Cash Flow | $24,000.00 |
Cash Flow % (Capital) | 6.35% |
As this is the most common method for net lease properties, this is the default setting and is turned on automatically in the Cash Flow module.
Example: Calculating Cash on Cash Return Based on Current Equity
This method calculates the cash on cash return percentage using the current Estimated Equity. Estimated Equity is determined by subtracting the current loan balance from the Estimated Value of the property. This approach focuses on assessing the return based on the current market value of your equity, reflecting changes in property value and debt over time.
Estimated Value | $1,320,000.00 |
Loan Balance | $769,600.00 |
Estimated Equity | $550,400.00 |
Annual Cash Flow | $24,000.00 |
Cash Flow % (Equity) | 4.36% |
This setting can be enabled by deactivating the Capital switch in the Cash Flow Module.
The Value of Dual Return Calculations
While many investors initially focus on returns based solely on the capital invested at purchase, this perspective can miss critical changes over time. Property values may appreciate, and loan balances can decrease significantly through payments, altering the equity landscape.
By calculating cash on cash returns based on both the initial capitalization and current equity, Trinety ensures that investors have a comprehensive understanding of their investment's performance at any given time. This dual approach helps reveal a more accurate return, especially in scenarios where the property's market value has increased or debt has been substantially reduced, which might otherwise suggest a lower return than the reality.