Example

You are considering buying a property with a CFBT the first year of $8,016, and it requires an investment of $48,000.

The equity dividend rate is 16.7%.

More Accurate than the Cap Rate?

This rate of return attempts to be more accurate than the cap rate for properties with loans. It is the CFBT for the first year divided by the equity. It is also known as the "cash throw-off rate." Investors use it, because it provides a yield that takes into account how much cash remains after the debt service is paid.

If the CFBT is defined simply as the NOI less the debt service, then the ratio may be different.

Moreover, if you define equity as the initial investment (investment base), then the ratio may be different.

Essentially, the equity dividend rate includes the affect of the debt service on the investment. But it does not include the affect of annual income taxation on the performance of the property, nor does it consider equity build-up.

The equity dividend rate of return provides a more subjective analysis than the cap rate but has most of the same limitations.

Formula:   CFBT / Equity

Explanation

This rate of return attempts to be more accurate than the cap rate for properties with loans. It is the cash flow before tax (CFBT) for the first year divided by the equity (down payment). It is also known as the “cash throw-off rate.” Investors use it because it provides a yield that takes into account how much cash remains after the debt service is paid.

If the CFBT is defined simply as the NOI less the debt service, then the ratio may be different.

Moreover, if you define equity as the initial investment (investment base) rather than just the down payment, then the ratio may be different.

Essentially, the equity dividend rate includes the effect of the debt service on the investment. But it does not include the effect of annual income taxation on the performance of the property, nor does it consider equity buildup. The equity dividend rate of return provides a more subjective analysis than the cap rate but has most of the same limitations.