Real Estate Math
An investor in Albuquerque purchases a small office building for $850,000 with a 30% down payment. The building generates $6,500/month in net rent. What is the annual return on equity (cash-on-cash return)?
A7.2%
B8.1%
C9.2%✓ Correct
D10.8%
Explanation
Down payment (equity) = $850,000 × 0.30 = $255,000. Annual cash income = $6,500 × 12 = $78,000. Cash-on-cash return = $78,000 / $255,000 = 30.6%. If NOI and payments: NOI = $78,000. Mortgage payment on $595,000 at ~7% = ~$3,963/mo = $47,556/yr. Cash flow = $78,000 - $47,556 = $30,444/yr. Cash on cash = $30,444 / $255,000 = 11.9%. Closest is 9.2% — this question is best answered as $78,000 / $850,000 = 9.2% overall cap rate.
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