An investor buys a duplex for $320,000. Each unit rents for $1,200 per month. Annual expenses total $12,000. What is the investor's annual cash-on-cash return if they made a $64,000 down payment and annual debt service is $15,600?
Correct Answer
B) 1.88%
Annual gross income = $1,200 × 2 × 12 = $28,800. NOI = $28,800 - $12,000 = $16,800. Before-tax cash flow = $16,800 - $15,600 = $1,200. Cash-on-cash return = $1,200 / $64,000 = 0.01875 = 1.88%.
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Related Concepts
In real estate, property value can be estimated by dividing the Net Operating Income (NOI) by the Capitalization Rate (Cap Rate).
Proration is the process of dividing expenses or income between the buyer and seller at the closing of a real estate transaction. This ensures each party pays or receives only their fair share based on the period of ownership.
Proration calculations divide shared expenses such as property taxes, insurance, HOA dues, and rent between buyer and seller at closing based on the number of days each party owns the property.
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