Cash-on-cash return measures how much cash a rental property puts in your pocket each year compared with the cash you invested to buy it. It is popular with investors who use financing, because it reflects the effect of the mortgage on your actual return.
How to calculate it
Cash-on-cash return = Annual pre-tax cash flow / Total cash invested
- Annual pre-tax cash flow is net operating income minus annual debt service (principal and interest).
- Total cash invested includes your down payment, closing costs, upfront repairs and any other cash you put in at the start.
Worked example
A hypothetical investor buys a $400,000 single-family rental with 25% down.
- Down payment: $100,000
- Closing costs: $8,000
- Initial repairs: $12,000
- Total cash invested: $120,000
The home rents for $3,000 a month. After vacancy and operating expenses, NOI is $24,000 a year. Annual mortgage payments are $19,200.
- Annual cash flow: $24,000 minus $19,200 = $4,800
- Cash-on-cash return: $4,800 / $120,000 = 4.0%
If the investor later raises rent so NOI grows to $26,400, cash flow becomes $7,200 and the cash-on-cash return rises to 6.0%, with no extra cash invested.
Why it matters for landlords
Cash-on-cash return answers a practical question: is this property paying me enough for the money I tied up? It helps you compare a rental with other places your cash could go, and it shows how loan terms change a deal. The same building can produce very different returns depending on the down payment and interest rate.
Keep in mind it is a one-year snapshot and excludes appreciation and tax effects. Tracking real cash flow by property in TenantLoop accounting lets you calculate it from actual results rather than estimates. Our single-family investing guide covers more ways to evaluate deals.
Related terms
In practice. How the term shows up day to day.
How is cash-on-cash return different from cap rate?
The cap rate ignores financing and assumes an all-cash purchase. Cash-on-cash return accounts for your loan payments and measures the return on the cash you actually put into the deal.
Does cash-on-cash return include appreciation?
No. It only measures annual cash flow. Appreciation, loan paydown and tax benefits are separate parts of total return.