| Line item | Amount |
|---|---|
| Down payment (25 percent of 250,000) | 62,500 dollars |
| Closing costs | 6,000 dollars |
| Upfront repairs | 6,500 dollars |
| Total cash invested | 75,000 dollars |
| Annual pre-tax cash flow | 6,000 dollars |
| Cash-on-cash return (cash flow / cash invested) | 8.0 percent |
Glossary · Investment
Cash-on-Cash Return
Cash-on-cash return is a property's annual pre-tax cash flow divided by the total cash invested, shown as a percent. Total cash invested includes the down payment, closing costs, and upfront repairs. Because it measures return on out-of-pocket dollars rather than the full property value, it captures the effect of leverage and shows how hard your invested cash works.
How is cash-on-cash return calculated?
Cash-on-cash return equals annual pre-tax cash flow divided by total cash invested, times 100. Cash flow is income after operating expenses and the mortgage. Total cash invested is the money you actually put in: down payment, closing costs, and any upfront rehab.
Only real out-of-pocket cash goes in the denominator, not the loan amount. If you buy in all cash, the denominator is the full purchase price plus costs, and cash-on-cash return moves closer to the cap rate.
Use pre-tax cash flow for the standard version so results stay comparable across investors with different tax situations. Recalculate yearly, since rising rents or a refinance change both the numerator and the cash you have tied up.
What is a good cash-on-cash return?
Targets vary widely by market and strategy. Many rental investors look for something in the high single digits to low double digits, often cited around 8 to 12 percent, but this is a rule of thumb, not a guarantee or investment advice.
Leverage can lift cash-on-cash return by shrinking the cash you invest, but it also adds risk, since debt magnifies losses when income falls. A high figure built on heavy borrowing is not automatically safe.
Compare cash-on-cash return against other uses of the same money, such as another property or a different asset class. Context, risk, and your goals matter more than hitting a specific percentage.
What is the difference between cash-on-cash return and ROI?
Cash-on-cash return counts only annual cash flow against cash invested in one year. ROI is broader, often folding in appreciation, equity buildup from loan paydown, and tax benefits over time. Cash-on-cash measures yearly cash yield; ROI measures total return.
A property can post a modest cash-on-cash return yet a strong overall ROI once appreciation and principal paydown are counted. The two answer different questions and are best viewed together.
Cash-on-cash return is popular because it is simple and reflects real, spendable income each year. But it ignores wealth building you cannot spend yet, so do not judge a long-term hold on cash yield alone.
Worked example. For example, suppose you buy a rental for 250,000 dollars with a 25 percent down payment of 62,500 dollars. Closing costs are 6,000 dollars and upfront repairs 6,500 dollars, so total cash invested is 75,000 dollars. After collecting rent and paying operating expenses and the mortgage, the property produces 6,000 dollars of annual pre-tax cash flow. Cash-on-cash return equals 6,000 divided by 75,000, or 0.08, which is 8 percent. Buying the same property in all cash would change both numbers.
Common mistakes with Cash-on-Cash Return
- Do not use the full purchase price as the denominator when you financed the deal; use only the cash you actually invested.
- Do not omit closing costs and upfront repairs from total cash invested, because leaving them out overstates the return.
- Avoid confusing cash-on-cash return with cap rate; one reflects financing and out-of-pocket cash, the other does not.
- Do not mix pre-tax and after-tax cash flow across deals, since inconsistent inputs make comparisons misleading.
- Do not assume a high leveraged return is low risk, because borrowing amplifies losses if income or values decline.
Related terms
Term
Cash Flow
The money left over from a rental property after all expenses, including the mortgage, are
Define TermCapitalization Rate (Cap Rate)
A property's net operating income divided by its value, used to gauge investment return an
Define TermNet Operating Income (NOI)
A property's income after operating expenses but before mortgage payments and income taxes
Define TermReturn on Investment (ROI)
A measure of an investment's profitability, expressed as gain relative to its cost.
DefineCash-on-Cash Return FAQ
What counts as total cash invested?
Total cash invested is every out-of-pocket dollar to acquire and ready the property: the down payment, closing costs, loan fees, and any upfront repairs or renovations. It excludes the financed loan balance, since that money came from the lender, not from you.
How is cash-on-cash return different from cap rate?
Cap rate uses NOI and property value and ignores financing entirely. Cash-on-cash return uses actual cash flow after the mortgage divided by the cash you invested. Two buyers at the same price share a cap rate but can have very different cash-on-cash returns.
Does cash-on-cash return include appreciation?
No. It measures only annual pre-tax cash flow against invested cash. Appreciation, equity buildup from loan paydown, and tax benefits are excluded. For those, investors turn to broader ROI or internal rate of return, which capture total return over the full holding period.
Why does leverage raise cash-on-cash return?
Financing shrinks the cash you invest while the property still earns income, so a smaller denominator can lift the percentage. But leverage also adds a mortgage payment and magnifies losses if income falls, so a higher figure is not automatically safer.
Is an 8 percent cash-on-cash return good?
It can be reasonable in many markets, but good depends on your risk, goals, and alternatives. Compare it to other deals and asset classes, and weigh how much leverage produced it. Treat any target as a rule of thumb, not investment advice.
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