How to calculate cash-on-cash return (with a worked example)
Cash-on-cash return = Annual pre-tax cash flow ÷ Total cash invested x 100. Annual cash flow is rent minus vacancy, operating expenses, and debt service. Total cash invested is your down payment plus closing costs plus any immediate repairs. On a typical leveraged rental, expect 3% to 12% depending on market and financing.
Cash-on-cash return is the metric that answers the most practical question in real estate: "How much cash does my cash earn?" Not paper returns, not unrealized gains, not tax benefits. Actual dollars landing in your account from actual dollars you deployed. The formula is simple. Getting the inputs right is where most people trip.
The formula
Two numbers. One fraction. But each number is built from several inputs, and getting any of them wrong throws the result off. Here is how to build each one correctly.
Step 1: Calculate annual cash flow
Start from gross rent and subtract everything:
Operating expenses include property taxes, insurance, property management, maintenance, CapEx reserves, and any landlord-paid utilities (see our guide to estimating operating expenses). Debt service is your mortgage payment (principal + interest). Do not forget CapEx reserves and management, even if you self-manage. They belong in the calculation.
Step 2: Calculate total cash invested
The most common mistake: only counting the down payment. Closing costs on an investment property run 2% to 4% of purchase price ($7,000 to $14,000 on a $350,000 property). If the property needs $5,000 in work before it is rent-ready, that is cash you invested too.
Step 3: Divide and multiply
Annual cash flow ÷ Total cash invested x 100 = Your cash-on-cash return.
Step 4: Worked example
A $325,000 single-family rental in Indianapolis. 25% down, 7.0% rate, 30-year fixed.
Cash invested
| Item | Amount |
|---|---|
| Down payment (25%) | $81,250 |
| Closing costs (3%) | $9,750 |
| Immediate repairs | $3,000 |
| Total cash invested | $94,000 |
Annual cash flow
| Item | Monthly | Annual |
|---|---|---|
| Gross rent | $2,200 | $26,400 |
| - Vacancy (7%) | -$154 | -$1,848 |
| - Property taxes | -$250 | -$3,000 |
| - Insurance | -$125 | -$1,500 |
| - Management (9%) | -$198 | -$2,376 |
| - Maintenance (6%) | -$132 | -$1,584 |
| - CapEx reserves (5%) | -$110 | -$1,320 |
| = NOI | $1,231 | $14,772 |
| - Mortgage (P&I on $243,750) | -$1,622 | -$19,459 |
| = Cash flow | -$391 | -$4,687 |
The result
Negative. This deal loses $391 per month on a cash-flow basis. At 7.0% interest, the mortgage payment ($1,622) exceeds the NOI ($1,231). This is negative leverage in action: the property earns a 4.5% cap rate, but the debt costs 7.0%.
Does that make it a bad deal? Not necessarily. Paydown adds about $2,600 in year one, and 3% appreciation adds $9,750. Total ROI is roughly 8.2%. But the cash-on-cash is telling you clearly: this property costs you money each month. Can your reserves handle that?
What changes the number most
Cash-on-cash is sensitive to a few inputs more than others. On this same deal:
| Change | CoC impact |
|---|---|
| Rate drops from 7.0% to 6.0% | -5.0% becomes -0.5% |
| Rent increases from $2,200 to $2,400 | -5.0% becomes -1.7% |
| Price drops from $325k to $290k | -5.0% becomes 0.3% |
| All cash (no mortgage) | -5.0% becomes 4.5% (= cap rate) |
The interest rate has the single biggest impact. A 1-point rate drop on a $243,750 loan saves roughly $175/month, which is $2,100/year, which swings CoC by over 2 percentage points. This is why rate shopping on DSCR loans is not optional.
Common mistakes in the calculation
- Forgetting closing costs in the denominator. $9,750 in closing costs on this deal. Excluding them inflates your CoC by about 0.5%.
- Using gross rent instead of net. Gross rent is $26,400. Effective rent after vacancy is $24,552. The $1,848 difference flows straight to your CoC.
- Skipping CapEx reserves. Omitting the $1,320 annual CapEx line makes CoC look 1.4 points better. But when the roof fails in year 7, that money comes from somewhere.
- Using owner-occupied rates. Investor rates are typically 0.5% to 0.75% higher than owner-occupied. Using the wrong rate makes the debt service look cheaper than it actually is.
Frequently asked questions
How do you calculate cash-on-cash return?
Divide your annual pre-tax cash flow (rent minus vacancy, expenses, and mortgage) by your total cash invested (down payment, closing costs, and immediate repairs). Multiply by 100 for the percentage.
What is a good cash-on-cash return?
Most investors target 8% to 12% for long-term rentals. In expensive markets (Austin, Denver), 3% to 6% is common. In cash-flow markets (Memphis, Indianapolis), 8% to 12% is achievable. Compare against Treasuries (roughly 4.5%) to judge if the effort is worth it.
Does cash-on-cash include appreciation?
No. Cash-on-cash measures only cash in versus cash out. It excludes appreciation, loan paydown, and tax benefits. For the full picture including those, use total ROI.
Should I include closing costs in cash invested?
Yes. Closing costs are cash you spent to acquire the property. Excluding them inflates your return. On a $325,000 property, closing costs of 3% add $9,750 to your denominator, which lowers your CoC by about 0.5%.
Can cash-on-cash return be negative?
Yes. When the mortgage payment exceeds the NOI (common when interest rates are above the cap rate), the property generates negative cash flow, producing a negative CoC. This is called negative leverage and is common in 2025 to 2026 rate environments.