What is cash-on-cash return?
Cash-on-cash return is the cash a rental pays you in a year, before income taxes, divided by the cash you put in to buy it. It answers a simple question: for every dollar I invest, how many cents come back each year?
- Yearly cash flow is the rent you collect, minus operating costs (taxes, insurance, repairs, management) and mortgage payments.
- Total cash invested is your down payment plus closing costs plus any repairs you pay for up front.
Worked example
A $300,000 duplex with 25% down at 7.25% for 30 years, renting for $2,800 a month:
- Cash in: $75,000 down + $9,000 closing + $10,000 repairs = $94,000
- Rent collected after 5% vacancy: $31,920 a year
- Operating costs: $4,200 taxes + $1,500 insurance + $5,000 other = $10,700
- Mortgage on $225,000: about $1,535 a month, or $18,419 a year
- Cash flow: $31,920 − $10,700 − $18,419 = about $2,800 a year ($233 a month)
Cash-on-cash return: $2,800 ÷ $94,000 = 3.0%.
That’s well under an 8% target. The property covers itself, but the money would barely beat a savings account. Rent of $3,000 would lift it to about 5.4%; a lower price or rate would help too.
What’s a good cash-on-cash return?
Many rental investors aim for something like 8–12%, but there’s no universal rule. Some accept less in areas where they expect values to rise, and want more for older properties or tougher neighborhoods. Pick a target that fits your plan and compare deals against it.
Keep in mind that cash-on-cash return only counts cash in your pocket. It leaves out loan paydown, appreciation and tax benefits, which can add a lot to your total return over time.
How to improve it
- Negotiate the price or ask for seller credits toward closing costs.
- Raise rents to market, or add income like laundry, parking or storage.
- Shop the loan. A lower rate raises cash flow directly.
- Check the down payment. Putting less down can raise the percentage, but it also raises the payment, so run both ways.
Frequently asked questions
What’s the difference between cash-on-cash return and cap rate?
Cap rate ignores the loan and measures income against the full price. Cash-on-cash includes the mortgage and measures cash flow against only the cash you invested. Try the cap rate calculator to compare.
Should I count a reserve for big repairs?
Yes. Roofs, furnaces and water heaters wear out. Setting aside a few percent of rent for them gives a more honest cash flow.
Is it before or after taxes?
Usually before income taxes. Depreciation often lowers the tax you owe on rental income, which the full analyzer estimates.
Can cash-on-cash return be negative?
Yes. If costs and the mortgage are more than the rent, you’re adding money each year and the return is negative.
Check the whole deal
ElmCheck’s free deal analyzer takes these same numbers further: cap rate, DSCR, IRR, tax effects, ten-year projections and a buy, maybe or pass verdict.