Page 85 - Trump University Commercial Real Estate 101

Ho w to Read a Deal

Now let ’ s determine value with the cash - on - cash return . I like to use this
method when I ’ m buying, and the cap rate approach when I ’ m selling.
The cash - on - cash return tells us how fast we will get our money
back. That ’ s important because you want to get that money plowed back
into doing more deals.
Calculate cash - on - cash return this way: Divide annual cash fl ow
by your acquisition costs (that is, down payment and other up - front
expenses):

NOI – Debt Service

Cash on Cash Return __________________

Acquisition Costs
(Note: NOI – Debt Service is just another name for Annual
Cash Flow.)
Good deals usually have a starting cash - on - cash return of 10 percent
or more. There are exceptions, and some brokers may tell you it ’ s not pos-
sible to get a 10 percent cash - on - cash return in their market. If you hear
this, politely thank them and go on to the next broker. This one has just
told you that he ’ s not going to give you what you need to be successful.
Now that we have the basic calculations down, we can very quickly
look at a deal and determine if we want to take it to the next step.
The next deal in your pipeline comes in and it ’ s a 5 cap. We don ’ t
want to pay anything below an 8 cap, so we will probably pass on that
deal. Another one comes in with a 7 percent cash - on - cash return.
That ’ s not close to the 10 percent threshold, so you should probably
pass on that one too. On the other hand, if the person with that prop-
erty seems really motivated, you might feel like there ’ s room to nego-
tiate a lower price. In that case it would bring both the cap rate and
cash - on - cash return higher.
You can see how these two calculations will very quickly handle
most of what your deal pipeline delivers.
If the cap rate or cash - on - cash return is above or close to your
target numbers, it ’ s worth spending more time to see if this deal could
become a live one. You ’ ll need to analyze further to determine whether

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