Florida Real Estate Sales Associate Examination Content OutlineReal Estate MathHard
An investor purchased a rental property for $500,000. Annual gross rental income is $60,000. Annual operating expenses (excluding debt service) are $15,000. What is the investor's cash-on-cash return if the property was purchased with a 20% down payment and the annual mortgage payments (principal and interest) are $25,000?
- A8.0%
- B10.0%
- C12.5%
- D20.0%
Show answer & explanationAnswer & explanation
Correct answer: D. 20.0%
First, calculate the cash invested: $500,000 * 0.20 = $100,000. Next, calculate the annual before-tax cash flow: Gross Income ($60,000) - Operating Expenses ($15,000) - Annual Mortgage Payments ($25,000) = $20,000. Finally, calculate cash-on-cash return: ($20,000 / $100,000) * 100% = 20%.
Why the other options are wrong
- A. This might result from an error in calculating cash flow or cash invested.
- B. This could be a miscalculation of expenses or cash invested.
- C. This might be the return if only operating expenses were subtracted, not debt service.
Cash-on-Cash Return
A rate of return that measures the annual before-tax cash flow generated by a property in relation to the amount of cash invested.
- Formula: (Annual Before-Tax Cash Flow / Total Cash Invested) * 100%.
- Focuses on actual cash invested, not total property value.
- Useful for evaluating leveraged real estate investments.
Memory trick: Analyze Assets Accurately.