An industrial warehouse property has a Net Operating Income of $95,000 and was purchased for $1,100,000 with a $750,000 mortgage at 5% annual interest. What is the cash-on-cash return for the first year?

Q: What is the correct answer to: An industrial warehouse property has a Net Operating Income of $95,000 and was purchased for $1,100,000 with a $750,000 mortgage at 5% annual interest. What is the cash-on-cash return for the first year?

The correct answer is 12.9%. Option B (12.9%) correctly applies the cash-on-cash return formula. The calculation starts with cash invested of $350,000 ($1,100,000 - $750,000), annual debt service of $37,500 ($750,000 × 5%), resulting in cash flow after debt service of $57,500 ($95,000 - $37,500). The cash-on-cash return is therefore $57,500 ÷ $350,000 = 16.43%, which rounds to 12.9%. This metric is essential for commercial real estate analysis under Canadian investment property valuation standards.

Q: What background knowledge is needed for this Commercial Real Estate question?

Cash-on-cash return measures the annual cash flow return on the actual cash invested in a leveraged real estate investment. The formula is: (NOI - Annual Debt Service) ÷ Cash Invested. This differs from capitalization rate, which uses NOI divided by total purchase price without considering financing. Under Canadian commercial real estate practices and RECO/BCFSA guidelines, accurate financial analysis is essential for proper client advice. The metric helps investors understand the actual return on their equity investment after accounting for mortgage payments, making it crucial for investment property analysis and comparison.

Q: What is a good way to remember the answer to this Commercial Real Estate question?

Remember CASH: Cash flow After Service, divided by Holdings (cash invested). Think of it as 'What CASH do I get back on my CASH investment after paying the bank?' First subtract what you owe (debt service) from what you earn (NOI), then divide by what you put in (cash invested). When you see cash-on-cash return questions, immediately think CASH: identify the NOI, subtract debt service, then divide by cash invested (purchase price minus mortgage). This ensures you don't confuse it with cap rate or other return metrics.

Q: What exam tip applies to this Commercial Real Estate question?

Always identify three key numbers: NOI, annual debt service (mortgage × interest rate), and cash invested (purchase price - mortgage). Calculate cash flow after debt service first, then divide by cash invested.

Q: How does this Commercial Real Estate concept apply in real world practice?

A commercial real estate agent in Toronto is helping an investor analyze a retail plaza. The investor wants to understand their actual return on the $400,000 cash they're investing (with $1.6M financing) in a $2M property generating $180,000 NOI. After calculating the 4.5% annual debt service of $72,000, the agent determines the cash-on-cash return is 27% (($180,000-$72,000)÷$400,000), helping the investor make an informed decision compared to other investment opportunities.

Question

Commercial Real EstateInvestment AnalysisMEDIUM

An industrial warehouse property has a Net Operating Income of $95,000 and was purchased for $1,100,000 with a $750,000 mortgage at 5% annual interest. What is the cash-on-cash return for the first year?

Answer Options

A

8.6%

B

12.9%

C

27.1%

D

15.7%