Guides · 2 minute read

Cash-on-cash return, explained

The number that answers “what am I earning on the money I actually invested?”

Cash-on-cash return compares the pre-tax cash a rental puts in your pocket each year with the cash you invested to get it. Unlike cap rate, it includes your mortgage, so it reflects the deal you are actually making.

The formulaCash-on-cash = annual pre-tax cash flow ÷ total cash invested

What counts as cash invested

Count every dollar you put in up front: the down payment, closing costs, and any repairs or furnishing you pay for before the first tenant moves in. Leaving out closing costs and early repairs flatters the result.

A worked example

You buy a $275,000 house with 25% down ($68,750). Closing costs are about 3% ($8,250), so you have $77,000 invested. After the mortgage and all expenses, the property cash flows $321 a month, or $3,852 a year. Cash-on-cash return is $3,852 ÷ $77,000, about 5%.

See it on a real dealThe rental analyzer calculates cash-on-cash return including closing costs.

Cash-on-cash vs. cap rate

Cap rate ignores financing and compares properties. Cash-on-cash includes financing and evaluates your deal. When a loan costs less than the property yields, borrowing can lift cash-on-cash above the cap rate. When the loan costs more than the yield, which can happen at high interest rates, leverage drags cash-on-cash below it.

What is a good cash-on-cash return?

Many investors look for 8% to 12%, but the right target depends on your alternatives and your risk. A diversified stock index fund has historically returned a good deal more than 5% a year on average, though with real volatility. A rental should beat that after accounting for the extra work and risk, or have another reason to exist, such as expected appreciation.

What it leaves out

  • Mortgage principal you pay down, which builds equity but is not cash in your pocket.
  • Appreciation or depreciation of the property.
  • Tax effects, including depreciation deductions.
  • Large irregular repairs, unless you reserve for them in your expense estimate.

Use cash-on-cash alongside cap rate and monthly cash flow, and stress-test it with higher vacancy and repair costs before you decide.

Common questions

How do you calculate cash-on-cash return?

Divide your annual pre-tax cash flow, after mortgage payments, by the total cash you invested: down payment, closing costs and up-front repairs.

What is a good cash-on-cash return?

Many investors target 8% to 12%, but it depends on your alternatives, your market and how much risk and work you are taking on.

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

No. Cash-on-cash looks only at annual pre-tax cash flow relative to cash invested. Total ROI also counts equity growth, appreciation and tax effects.

Can cash-on-cash return be negative?

Yes. If rent does not cover the mortgage and expenses, cash flow is negative and so is the return.

Educational content, not investment, tax, legal or lending advice. Last updated .