What Is Cash-on-Cash Return?

Cap rate tells you what the property earns. Cash-on-cash return tells you what YOUR MONEY earns. That is a critical distinction because most landlords do not pay all cash for their properties. They put down 20-25% and finance the rest.

Cash-on-cash return is the metric that tells you if the money you actually invested is working hard enough.

How to Calculate Cash-on-Cash Return

Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested × 100

Annual pre-tax cash flow is your NOI minus your annual mortgage payment (principal + interest). Total cash invested is your down payment plus closing costs plus any immediate rehab costs.

Example: You buy a property for $300,000 with 25% down.

Down payment: $75,000
Closing costs: $8,000
Initial repairs: $12,000
Total cash invested: $95,000

Annual NOI: $27,000
Annual mortgage payment (P&I on $225,000 at 7%): $17,952
Annual cash flow: $27,000 - $17,952 = $9,048

Cash-on-cash return: $9,048 ÷ $95,000 = 9.5%

Your $95,000 in cash is earning 9.5% per year in cash flow alone. That is before appreciation, before principal paydown, and before tax benefits.

What a Good Cash-on-Cash Return Looks Like

• Below 5%: Weak. Your money might do better in an index fund with zero management headaches.
• 5-8%: Okay. Acceptable if the property is in a strong appreciation market or you expect rent growth.
• 8-12%: Good. This is the sweet spot for most rental property investors.
• Above 12%: Excellent. Strong cash flow. Make sure the numbers are real and not based on deferred maintenance or unrealistic assumptions.

The key comparison is the stock market. The S&P 500 has returned roughly 10% annually over the long term. If your rental property only returns 4% cash-on-cash, you are working harder for less money than a passive index fund investor.

The Leverage Effect

Cash-on-cash return shows why leverage (using a mortgage) can be powerful. Let's compare:

All cash purchase: Buy the same $300,000 property with $300,000 cash. NOI is $27,000. No mortgage payment. Cash flow is $27,000. Cash-on-cash return: $27,000 ÷ $300,000 = 9.0%.

With financing: Put down $95,000 total. Cash flow is $9,048. Cash-on-cash return: $9,048 ÷ $95,000 = 9.5%.

With financing, you invested less cash and earned a slightly higher percentage return. Plus you still have $205,000 to invest in other properties. This is why real estate investors use leverage. But leverage works both ways. If the property underperforms, your losses are amplified too.

Cash-on-Cash Return vs. Other Metrics

vs. Cap rate: Cap rate ignores financing. Cash-on-cash includes it. If you are comparing properties to buy with a mortgage, cash-on-cash is more relevant to your actual returns.

vs. Total ROI: Cash-on-cash only measures cash flow. Total ROI includes appreciation, principal paydown, and tax benefits. A property with a mediocre 6% cash-on-cash might have a 15% total ROI when you include appreciation.

vs. GRM: GRM is a rough screening tool using gross rent. Cash-on-cash is a detailed analysis tool using actual cash flow. They serve different purposes in your evaluation process.

Common Mistakes

Forgetting closing costs and rehab in total cash invested. Your cash invested is not just the down payment. Include every dollar you spent to acquire the property and get it rent-ready. Underestimating total cash invested inflates your cash-on-cash return and gives you a false sense of how well the investment is performing.

Using projected rent instead of actual rent. Build your cash flow projection on current, actual rents from the rent roll. Not what the listing agent says you "could" charge. If tenants are paying $1,000 and you plan to raise to $1,200, that income increase is not guaranteed until it happens.

Ignoring reserves. You need to set aside money for capital expenditures, vacancies, and unexpected repairs. If you are not reserving 5-10% of gross rent for these, your cash flow number is too high.

Not recalculating annually. Your cash-on-cash return changes every year. Rent increases improve it. Interest rate adjustments on variable-rate loans change it. Rising insurance and taxes decrease it. Recalculate every year to make sure your investment is still performing.

Frequently Asked Questions

What is a good cash-on-cash return for rental property?

Most investors target 8-12%. Above 12% is excellent. Below 5% means your money might perform better in simpler investments like index funds. Compare against the stock market's 7-10% historical return.

How is cash-on-cash return different from cap rate?

Cap rate measures the property's return assuming all-cash purchase. Cash-on-cash factors in your actual financing to show what your invested dollars earn. Same property, different numbers because financing changes the equation.

Does cash-on-cash return include appreciation?

No. It only measures annual cash flow against cash invested. Appreciation, principal paydown, and tax benefits are excluded. Use total ROI for the complete picture.