Cash-on-cash return, step by step
Cash-on-cash return is your annual pre-tax cash flow divided by the total cash you invested (down payment plus closing costs and any rehab). It tells you how hard your actual cash is working. Many investors target 8% to 12%, with 10% a common benchmark.
Unlike cap rate, cash-on-cash accounts for your financing and the real cash you put in, so it answers the question that matters: what is my money earning here?
What is cash-on-cash return?
Cash-on-cash return is annual pre-tax cash flow divided by total cash invested. Cash flow is rent minus every cost including the mortgage. Cash invested is what actually left your account: down payment plus closing costs plus rehab.
It is a one-year, cash-only number. It excludes appreciation and loan paydown, which the rental ROI metric adds back in.
Step by step, with numbers
- Purchase price $350,000, 25% down = $87,500.
- Closing costs around 3% = roughly $10,500. Cash invested ≈ $98,000.
- Rent $2,800/mo, expenses $700/mo, loan payment about $1,790/mo.
- Monthly cash flow = 2,800 − 700 − 1,790 = $310, about $3,720 a year.
What is a good cash-on-cash return?
| Cash-on-cash | Read |
|---|---|
| 8% and up | Strong. Your cash is working hard relative to passive options. |
| 4% to 8% | Moderate. Reasonable once paydown and appreciation are added. |
| 0% to 4% | Low. Compare against other uses of the same cash. |
| Below 0% | Negative. You feed the property monthly; an appreciation bet only. |
How leverage changes it
This is the part that surprises people. Put more down and your monthly cash flow improves, but your cash-on-cash usually falls, because you tied up more cash to earn it. Less down often raises the percentage while thinning the monthly buffer. There is no universal right answer; it depends on whether you optimize for monthly cash flow or return on capital.
Common mistakes
- Leaving out closing costs. They can be 2% to 5% of the price and shrink the return.
- Counting appreciation here. Cash-on-cash is cash only; use rental ROI for the full picture.
- Forgetting capital expenses. A new roof is not in the monthly number but it is real money. Keep reserves.
Frequently asked questions
What is a good cash-on-cash return on rental property?
Many investors target 8% to 12%, with 10% a common benchmark. In expensive markets, investors often accept 6% to 8%; in higher-yield markets and short-term rentals, 12% to 15%+ is the goal.
What is the difference between cash-on-cash return and ROI?
Cash-on-cash is one type of ROI that counts only year-one cash flow against cash invested. Full rental ROI also adds loan paydown and appreciation, so it is usually a higher number.
Does cash-on-cash include principal paydown?
No. It counts only operating cash flow. The equity you build by paying down the loan shows up in total ROI and in your proceeds when you sell, not in cash-on-cash.
How does leverage affect cash-on-cash return?
More leverage (less down) usually raises the cash-on-cash percentage because you commit less cash, but it lowers monthly cash flow and raises risk. Less leverage does the reverse.