Cash-on-cash return

Cash-on-cash measures the return on the actual cash you put into the deal — down payment, closing costs, initial rehab — not the full purchase price.

Formula: Cash-on-cash = Annual pre-tax cash flow ÷ Total cash invested.

Example

$80,000 cash invested, $8,400 annual cash flow → 10.5% cash-on-cash.

How it differs from cap rate

Cap rate ignores financing; cash-on-cash includes it. A 6% cap rate property can produce a 10% cash-on-cash with 25% down at a reasonable rate — that's positive leverage. The same property at a 9% mortgage rate may be flat or negative — that's negative leverage.

Watchouts

• It ignores principal paydown and appreciation — the full return is usually higher.
• It can be gamed by aggressive vacancy/maintenance assumptions.
• Year-1 cash-on-cash can be misleading; model 5 years.