Cash-on-Cash Return Explained

Cash-on-cash return is the money a rental puts in your pocket in a year, divided by the cash you invested to buy it. It shows the return on your own money, which the cap rate does not.

The formula

Cash-on-cash return = annual cash flow ÷ total cash invested

Annual cash flow is net operating income minus the year's loan payments, before income tax.
Total cash invested is the down payment plus closing costs plus any repairs you pay for upfront.

Loan principal that you pay down is not counted as cash flow, and neither is any rise in the property's value. Both can matter to your wealth, but this measure only looks at the cash.

A worked example

A $300,000 property with 25 percent down, a 6.5 percent 30-year loan, $9,000 closing costs and $2,400 monthly rent, with vacancy, tax, insurance and running costs as on the rental property calculator. These are example figures, not a forecast.

Annual cash flow: $569
Cash invested: $75,000 down + $9,000 closing = $84,000
Cash-on-cash return: $569 ÷ $84,000 = 0.68%

That is a thin return. It is also very sensitive, as the next section shows.

What moves it

Small changes to the inputs can swing cash-on-cash a long way, because the cash flow is a small number compared with the income and costs around it. Starting from the example above, at 0.68%:

Rent $200 higher: cash flow becomes $2,439 and the return becomes 2.90%.
A lower interest rate, 5.5 percent instead of 6.5: the return becomes 2.74%.
A bigger down payment, 35 percent instead of 25: cash flow rises to $2,845 because the loan is smaller, and the return becomes 2.50%, even though you invest $30,000 more cash. Here the loan costs 6.5 percent while the property earns a 5.88% cap rate, so borrowing less helps. If the loan were cheaper than the cap rate, the effect would go the other way.

Try these in the calculator. They show why checking a deal at slightly worse rent or higher costs is a good habit.

Cash-on-cash versus cap rate

The cap rate divides income by the purchase price and ignores your loan. Cash-on-cash return divides cash flow by what you actually put in, so it changes with how you finance the deal. The cap rate guide shows an example where borrowing lowers or raises the return depending on the loan rate.

What it does not include

Appreciation or a fall in value.
The principal you pay off each month.
Tax effects, including depreciation.
Large repairs after purchase, unless you put them in the reserve.
Changes to rent over time.

Use it as one number alongside others, such as cap rate and debt service coverage. There is no single good value, because it depends on the market and your goals. This guide is general information, not financial advice.

Questions

What is a good cash-on-cash return?

There is no single answer. It depends on the market, the risk and what else you could do with the same money. Compare it with other options open to you, and test the deal with worse rent and costs than you hope for.

Does cash-on-cash return include appreciation?

No. It only counts the cash the property produces in a year. Appreciation, loan paydown and tax effects are separate.

Should closing costs count as cash invested?

Yes. Cash invested is everything you pay out of pocket to acquire the property: the down payment, closing costs and any upfront repairs.

Is cash-on-cash return the same as ROI?

Not exactly. ROI can mean different things, and some versions include appreciation and the equity you build as you pay the loan down. Cash-on-cash is the narrower measure of annual cash against cash invested.