Cash-on-cash return: what it is, how to calculate it, and a worked example

Cash-on-cash return answers one question: for every dollar you personally put into a rental property, how many cents come back to you in cash each year? It ignores appreciation and loan paydown on purpose. It is the number that tells you whether the property pays you while you own it.

The formula

Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested.

Annual cash flow is rent, minus vacancy, minus operating expenses, minus your mortgage payments for the year. Total cash invested is everything that left your bank account to acquire the property: the down payment, closing costs, and any upfront repairs. The most common mistake is to count only the down payment. That makes the return look higher than it is.

A worked example

Take a single-family rental listed at $200,000.

Step 1: Cash invested. A 25% down payment is $50,000. Add $6,000 in closing costs and $4,000 for paint and a water heater before the first tenant moves in. Total cash invested: $60,000.

Step 2: Income. Rent is $1,900 a month, or $22,800 a year. After a 6% vacancy allowance ($1,368), effective income is $21,432.

Step 3: Operating expenses. Property taxes $3,000, insurance $1,200, maintenance at 8% of rent $1,824, management at 8% $1,824, and capital reserves at 5% $1,140. Total: $8,988. That leaves net operating income of $12,444.

Step 4: Debt service. The $150,000 loan at 7% over 30 years costs about $998 a month, or $11,975 a year.

Step 5: Cash flow and return. $12,444 − $11,975 = about $469 a year in cash flow. Divide by the $60,000 invested: 0.8% cash-on-cash return.

The same property has a cap rate of 6.2% ($12,444 ÷ $200,000), which sounds respectable. At 7% interest the loan eats almost all of the income, and that is exactly the gap cash-on-cash return is meant to show.

What changes the answer

Change the rent to $2,100 and keep everything else the same. Percentage-based costs rise slightly, so net operating income becomes $14,196, annual cash flow becomes about $2,221, and cash-on-cash return rises to 3.7%. A $200 difference in monthly rent moves the return by nearly five times. Small inputs matter, so check rent against real comparable listings before you trust any figure.

What is a good cash-on-cash return?

Many investors look for 8% or more. Some accept 4–6% in appreciating markets, and others want 10%+ in slower ones. A useful floor is what your cash could earn with no work and no risk. If a savings account or Treasury bill pays 4–5%, a rental returning 1% in cash has to justify itself through appreciation and loan paydown alone.

What cash-on-cash return leaves out

It is a year-one snapshot. It excludes principal paydown, appreciation, and tax benefits such as depreciation, and it does not account for rent growing over time. Use it alongside the cap rate calculator and the DSCR calculator, not instead of them. For more on the cash flow input, read how to calculate rental cash flow.

Run your own numbers

Enter your deal into the free cash-on-cash return calculator, or run the full rental property analysis to see cash flow, cap rate, DSCR, and a verdict together.