An industrial warehouse with a net operating income of $95,000 was purchased for $1,100,000 with a $750,000 interest-only mortgage at 5% annual interest. Ignoring closing costs, what is the first-year cash-on-cash return?
Correct Answer
A) 16.4%
Cash invested is $1,100,000 − $750,000 = $350,000. Interest-only debt service is $750,000 × 5% = $37,500, leaving cash flow of $95,000 − $37,500 = $57,500. Cash-on-cash return = $57,500 ÷ $350,000 = 16.4%.
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