Equity Dividend Rate (Cash on Cash)
Equity Dividend Rate, sometimes called the cash on cash return. This is probably the most important ratio you need to focus on when evaluating the long-term performance of a property investment. Cash on Cash Return is the property's annual net cash flow divided by your net investment, expressed as a percentage.
If the net cash flow from a property is $25,000, and the cash invested in the property is $250,000, then the Cash on Cash return is calculated to be 10% ($25,000/$250,000). The net investment in property is the cost of the property less the amount you borrowed.
Another way to understand the Equity Dividend Rate is to think of a certificate of deposit. You deposit money in the bank and the bank pays you an annual return rate of 3.25%. The 3.25% is the Cash on Cash ratio.
Cash on Cash return does not include property appreciation which is a non-cash flow item until the year of sale. In evaluating a property on a long-term basis, investors focus on the annual cash flow as it relates to their investment.
Investors use the equity dividend rate most frequently in their initial investment analysis. It’s calculated as
Equity Dividend Rate = Before-tax cash flow ÷ Equity Invested
Because the calculation is based solely on before-tax cash flow relative to the amount of cash invested, it does not take into account the investor's tax position, nor does it take into account any appreciation, depreciation, or other risks regarding the property.
