Cash-on-cash return measures the annual return an investor earns on the actual cash they put into a property. It is calculated by dividing the property's annual pre-tax cash flow by the total cash invested, such as the down payment, closing costs, and any upfront repairs.
Because it focuses on out-of-pocket cash rather than the full property value, it captures the effect of leverage. Financing a property with a mortgage can boost the cash-on-cash return by reducing the cash needed while still capturing the property's income.
Investors use this metric to compare the efficiency of their invested dollars across deals and against other investments. Unlike cap rate, which ignores financing, cash-on-cash return reflects how a specific purchase is funded.