To identify the cash on cash
return of the investment, the cash costs of acquiring the asset are lumped
together and are then compared to the cash flow after all the operating
expenses and mortgage payments are determined. Over time, as rents increase,
the cash on cash return typically improves.
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If banks are paying higher
interest rates on saving, then investors demand better cash on cash returns for
their outlay, which usually means that borrowing rates are also high. This
ultimately means lower purchase prices. According to Marko Rubel when banks' lending interest rates are very low and
they are paying low interest rates on deposits, cap rates will fall; and when
cap rates fall, purchase prices go up.
Marko Rubel suggest that once we have aggregated all the costs of
acquisition and added them to the purchase price, we can simply deduct the loan
amount to calculate the money required to close the escrow. You can make a
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