Cash-on-Cash Return Practice Questions

Question 1 of 5

Salesperson Ingrid's client wants to achieve a minimum 8% cash-on-cash return. A building has an NOI of $150,000 and the client can obtain a mortgage at 5% interest over 25 years. What is the maximum price the client should pay?

• AThis requires working backward from the target return: if the client invests equity (E) and borrows the rest, the annual cash flow must be at least 8% of E; the calculation involves determining the mortgage payment at the given terms, subtracting it from the NOI to get cash flow, and ensuring cash flow / equity >= 8% — the maximum price depends on the leverage ratio, and the answer requires iterative calculation of the debt-equity combination
• B$1,875,000 ($150,000 / 8%), since this calculation gives the price at an 8% cap rate, not an 8% cash-on-cash return, and cash-on-cash depends on the financing structure, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements
• CThe maximum price equals the NOI multiplied by 8, based on the mortgage qualification criteria that assess the borrower's income, credit history, debt ratios, and the property's appraised value relative to the loan amount
• DCash-on-cash targets cannot be used to determine purchase prices, under the standard mortgage lending guidelines that apply to this type of property and financing arrangement, including applicable stress test requirements

Question 2 of 5

Salesperson Keisha's investor client wants to understand cash-on-cash return. The client is purchasing a 6-unit building for $1,200,000 with a $300,000 down payment. The annual NOI is $78,000 and annual debt service (mortgage payments) is $54,000. What is the cash-on-cash return?

• A6.5% ($78,000 / $1,200,000), considering that this calculation produces the cap rate, not the cash-on-cash return
• B18% ($54,000 / $300,000)
• C26% ($78,000 / $300,000)
• D8% ($24,000 / $300,000) — calculated as annual pre-tax cash flow divided by total cash invested

Question 3 of 5

Broker Li's client wants to sell one building from a three-building portfolio to fund renovations on the other two. How should the disposition decision be made?

• ASell the building with the lowest value to minimize the sale's impact
• BThe decision should be based solely on which building the investor likes least real estate, as the applicable regulatory framework and industry practices establish the standards and procedures that govern how this type of matter is addressed in Ontario real estate
• CAlways sell the most valuable building to maximize cash proceeds
• DThe disposition decision should consider: which building has the least upside potential remaining, which sale generates the highest after-cost proceeds, the tax implications (capital gains, recapture) of selling each building, the impact on portfolio diversification, the impact on the remaining portfolio's debt coverage and financing relationships, and whether the renovation capital from the sale will generate returns that exceed what the sold building would have produced if retained

Question 4 of 5

Salesperson Tariq's investor client asks about the cash-on-cash return for a multi-residential building. The building generates $120,000 NOI, the mortgage payment is $80,000 annually, and the client invested $500,000 as a down payment. What is the cash-on-cash return?

• AThe cash-on-cash return is 8% ($40,000 / $500,000), where $40,000 is the pre-tax cash flow after debt service ($120,000 NOI minus $80,000 mortgage payments); this metric shows the actual cash return on the investor's equity investment, making it more relevant to leveraged investors than the cap rate alone
• BThe cash-on-cash return is 24% ($120,000 / $500,000), on the basis that calculation uses noi instead of after-debt-service cash flow, especially where the borrower's income, credit profile, and debt ratios meet the standard qualification criteria applied by institutional lenders for this type of property
• CThe cash-on-cash return is 6.67% ($80,000 / $1,200,000), especially where the borrower's income, credit profile, and debt ratios meet the standard qualification criteria applied by institutional lenders for this type of property
• DCash-on-cash return cannot be calculated without knowing the property's appreciation — cash-on-cash is specifically a cash flow metric that does not require appreciation estimates

Question 5 of 5

An investor asks broker Yuki to explain the difference between cash-on-cash return and internal rate of return (IRR) for evaluating a multi-residential investment. How do these metrics differ?

• AThey are the same metric expressed differently — cash-on-cash and irr are fundamentally different metrics that measure different aspects of investment performance
• BCash-on-cash return measures annual cash flow as a percentage of invested equity in a single year, while IRR accounts for the time value of money across the entire investment period including annual cash flows, mortgage principal paydown, and the projected sale proceeds — IRR provides a more complete picture of total investment performance over the full holding period
• CIRR is only used for stock market investments, not real estate real estate
• DCash-on-cash return is always higher than IRR