CFA Level IAlternative InvestmentsMedium
A real estate property is purchased for $10 million. It generates $800,000 in Net Operating Income (NOI) in its first year. If the property's value appreciates by 5% in the first year and it is sold for $10.5 million at the end of the year, what is the unlevered initial cash-on-cash return for the first year?
- A10.00%
- B8.00%
- C13.00%
- D5.00%
Show answer & explanationAnswer & explanation
Correct answer: B. 8.00%
The unlevered initial cash-on-cash return is calculated as the first year's Net Operating Income (NOI) divided by the initial equity investment (which is the purchase price in an unlevered scenario). Property appreciation and sale price are not relevant for this specific metric.
Why the other options are wrong
- A. This would be incorrect, potentially summing NOI and appreciation or miscalculating.
- C. This significantly overestimates the return, possibly including capital gains or other factors not relevant to cash-on-cash.
- D. This calculates the property appreciation, not the cash-on-cash return.
Unlevered Initial Cash-on-Cash Return
A real estate metric that measures the annual return on the initial cash invested, before any debt financing.
- Calculated as Net Operating Income (NOI) divided by the initial equity investment (purchase price if unlevered).
- Focuses solely on the cash flow generated by the property, not capital appreciation.
- Provides a snapshot of the property's income-generating ability relative to its cost.
Memory trick: Cash-on-Cash: How much cash income from your initial cash payment.