How to Solve for Equity Dividend Rate

by Bryan Keythman

An equity dividend rate measures the annual cash flow an investment property generates before taxes as a percentage of the cash initially invested in the property. While an investor’s total investment in a property typically consists of cash and a mortgage, the equity dividend rate focuses only on the annual return on the cash portion of your investment. Equity dividend rate is also known as the cash-on-cash return. A higher equity dividend rate represents a greater return on your cash investment. You can calculate your equity dividend rate annually to monitor your returns.

Add together the total rental income and the total other income you received from an investment property during the most recent year to calculate the property’s gross income. Other income includes money from laundry machines, parking fees and similar items for which tenants pay. For example, assume a property generated $250,000 in rental income and $10,000 in other income. Add $250,000 to $10,000 to get $260,000 in gross income.

Subtract the property’s total operating expenses during the year from gross income to calculate net operating income, or NOI. Operating expenses include items such as maintenance, utilities, supplies, wages, salaries, insurance and property taxes. In this example, assume your property had $90,000 in operating expenses. Subtract $90,000 from $260,000 to get $170,000 in NOI.

Subtract the property’s total debt service during the year from NOI to calculate its before-tax cash flow. Debt service includes all interest and principal payments you made toward the property’s mortgage. In this example, assume you paid $90,000 in total debt service during the year. Subtract $90,000 from $170,000 to get $80,000 in before-tax cash flow.

Divide before-tax cash flow by the amount of cash you initially invested in the property. In this example, assume you initially invested $500,000 cash in the property. Divide $80,000 by $500,000 to get 0.16.

Multiply your result by 100 to calculate your equity dividend rate as a percentage. In this example, multiply 0.16 by 100 to get a 16 percent equity dividend rate, which means you earned a 16 percent return on your $500,000 cash investment over the past year.

Warning

  • The equity dividend rate measures the annual return on your cash investment before the effects of income taxes, which could reduce your returns.

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