What is a Cash-On-Cash Return?

Investing in commercial real estate requires accurate analysis of profitability and returns to assist with the evaluation of each opportunity. The cash-on-cash return formula is a calculation commonly used by investors and retail real estate leasing brokers to provide valuable insight into a property’s return on investment (ROI). Below is a breakdown of everything you need to know regarding cash-on-cash returns.  

Cash-On-Cash Return Formula

A cash-on-cash return is a simple formula that determines the annual return rate generated on a property compared to the amount invested. To discover the cash-on-cash return rate, divide the annual pre-tax cash flow by the total cash invested.

Cash-On-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested

Breaking Down Cash-On-Cash Return

The annual pre-tax cash flow is deduced by subtracting vacancies, operating expenses and mortgage payments from the total amount of revenue generated from tenant lease payments and other forms of income from the current period. This number is the building’s net operating profit.

The total cash invested refers to the amount of money spent in cash throughout the current period. This includes the down payment, any additional closing costs, insurance premiums, maintenance and other various expenses.   

As most commercial real estate investments demand long-term debt borrowing, the actual ROI differs from the yearly liquid return. Determining a commercial property’s cash-on-cash return rate provides a more precise portrayal of the investment’s current cash value because it does not consider debt. The cash-on-cash return rate can also be used to predict the potential cash circulation of a commercial investment opportunity. An investor may then extrapolate the resulting percentage to estimate expected returns on the life of their ideal investment.

Cash-On-Cash Return Example

Suppose an investor wants to assess a single-tenant property to gauge potential profit margins. The proposed lease outlines an agreement that requires the tenant to pay $80,000 in rent. The investor would ultimately pay $50,000 in mortgage payments, including interest premiums. The purchase would require a $90,000 down payment and $10,000 in closing costs from the investor. The annual pre-tax cash flow, in this case, is $30,000 (rent revenue – mortgage payments). The total cash invested in this scenario is $100,000 (down payment + closing costs). This results in a cash-on-cash return rate of 30 percent.

Limitations of the Formula

Though a cash-on-cash return provides valuable intel, its simplicity renders it limited in some regards. Not only does the equation exclude debt, but it also neglects any appreciation or depreciation on the property. Additionally, the cash-on-cash formula fails to account for potentialities such as risks and unforeseen maintenance costs. It’s important to understand that the cash-on-cash formula is best used to calculate simple interest and returns, or the total cash earned in relation to the total cash invested.  

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


What is a Double Net Lease?

A net lease is a popular form of a commercial real estate lease where the tenant assumes certain financial responsibilities in addition to the pre-determined rental rate. Different variations of net leases exist to accommodate specific building expenses–single, double and triple net leases. The biggest difference between these net lease variations is how the additional expenses are divided between the landlord and the tenant. Here is everything you should know about double net leases.

What are the features of a double net lease?

In a double net lease, the tenant agrees to pay the property taxes and insurance fees in addition to the pre-determined rental rate. A double net lease gives the tenant more financial responsibility than a single net lease, but also requires the landlord to handle repairs and pay any necessary maintenance fees. In a multi-tenant building, the property taxes and premiums for property insurance can be split on a pro rata basis between the other tenants renting within the building.

What are the advantages of a double net lease?

Landlords may use a double net lease because it shifts most of the financial responsibility, and thus much of the organizational pressure and stress that comes with managing and paying multiple property expenses. However, as landlords remain responsible for the upkeep and maintenance of the property, they still assume a certain level of control over how the space is used and maintained. Additionally, tenants may opt for a double net lease because these contracts typically have a lower rental rate than a single net lease and less financial management than a triple net lease.

What are the considerations of a double net lease?

While a double net lease limits the financial risk for landlords, property taxes and insurance fees typically still pass through them to ensure these important expenses are paid correctly and in a timely manner. Accordingly, this can complicate this process instead of simplifying it. Additionally, tenants need to consider the property taxes and insurance fees and understand that the responsibility of these additional expenses may outweigh the lower rates in rent in some cases.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

 


What is a Net Lease?

Commercial real estate leases fall primarily into two categories—either a net lease or a gross lease. The most common type of lease in commercial real estate is a net lease because it relieves landlords of serious financial responsibilities and gives tenants more control over how much they’re spending on certain services. But what exactly Is a net lease? Read on to find out everything you need to know about net leases in commercial real estate.

Features of a Net Lease

On top of the pre-established based rent, a net lease requires the tenant to assume responsibility for at least one, if not all, of the additional operating expenses associated with the property. Three different types of leases exist to determine which portion of these additional expenses are to be paid for by the tenant. A single net lease requires the tenant to pay both the rent and the property tax on the property, while a double net lease requires the tenant to pay the rent, the property taxes and property insurance for the space. A triple net lease requires the tenant to pay all of the expenses associated with the property, including the rent, property taxes, insurance, maintenance costs and repairs.

Advantages of a Net Lease

A net lease is a common type of lease in commercial real estate because it benefits both landlords and tenants. For landlords, it alleviates significant financial responsibilities of owning and operating the property. Net leases streamline the process of paying insurance and property taxes and make paying these expenses less complicated and stressful for the landlords. In addition, net leases give landlords a predictable source of income because they eliminate unexpected expenses and alleviate the financial responsibility of property taxes and insurance, which typically fluctuate over time.

Tenants experience significant benefits of net leases as well. Because tenants assume the responsibilities of additional expenses, net leases generally result in lower rental rates of the actual property. Additionally, net leases give tenants more property control because they are held accountable for at least a portion, if not all, of the property expenses. Accordingly, a considerable amount of property control is allotted to the tenant. Renting under a net lease gives tenants a closer experience of property-owning than a typical renter.

Considerations of a Net Lease

Net leases also can have some drawbacks if the building or property is not properly maintained and managed. For tenants, the maintenance costs might outweigh the lower cost in rent if there are constant major repairs. Likewise, most landlords prefer insurance and tax payments to pass through them to ensure the amount is correct and on time, which at times may complicate the process more than simplify it.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!