How to Solve for Equity Dividend Rate

Source: Wikipedia user James Steakley

Commonly used by real estate investors, an equity dividend rate is a useful metric to determine an investment's annual return relative to the initial amount of money invested. Also known as the cash-on-cash return, this metric focuses entirely on the actual amount of cash invested in a property, not the purchase price. In a nutshell, the equity dividend rate is an excellent way to determine the annual profitability of a real estate investment.

Calculating the equity dividend rate

First, add up the total income the property produced over the course of a year. Be sure to include all sources of income, not just the rent collected. For example, many apartment properties get extra revenue from coin-operated laundry machines, and some properties require tenants to pay for parking. This is thegross income of the property.

Next, add up all of the property's operating expenses, which may include

  • Maintenance
  • Landlord-paid utilities
  • Supplies
  • Wages/salaries
  • Property taxes
  • Insurance

Then, subtract the operating expenses from the gross income to calculate your net operating income, or NOI.

Next, add up all of your debt service (mortgage) payments, and subtract this amount from the NOI to arrive at the property's pre-tax cash flow.

Finally, divide the pre-tax cash flow by the cash you initially invested, such as the down payment and any closing costs you paid to acquire the property, as well as any renovations or other initial investments. Multiply this amount by 100 to convert it to a percentage -- this is your equity dividend rate.

An example

Let's say that you purchase a small apartment building for $1,000,000, and that you spend $250,000 to acquire the property.

The apartments generate $100,000 in annual rent, and the laundry machines in the building produce another $5,000 for a gross income of $105,000. And, we'll say that the property's operating expenses for the year come to $30,000. So, the net operating income for the year is $75,000.

Finally, let's say that your mortgage payments come to $50,000, leaving you with a pre-tax cash flow of $25,000 ($75,000-$50,000). Dividing this amount by the initial $250,000 investment, and multiplying by 100 produces an equity dividend rate of 10%.

The $15,978 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in theFoolsaurus. Pop on over there to learn more about our Wiki andhow you can be involvedin helping the world invest, better! If you see any issues with this page, please email us Thanks -- and Fool on!

The article How to Solve for Equity Dividend Rate originally appeared on

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.