Cash On Cash Return

· 3 min read
Cash-on-cash return measures how much cash income you earn relative to the actual cash you invested — and it’s the metric that tells you whether…

Cash-on-cash return measures how much cash income you earn relative to the actual cash you invested — and it’s the metric that tells you whether a rental property is a good use of your money right now, not someday.

The formula: Annual pre-tax cash flow / Total cash invested x 100. If you put $60,000 into a rental (down payment, closing costs, initial repairs) and it nets $6,000/year in cash flow after all expenses and mortgage payments, your cash-on-cash return is 10%.

Why It Beats Other Metrics

Cap rate ignores your financing. ROI includes appreciation you haven’t realized yet. Cash-on-cash return answers the question every investor actually cares about: “What’s my money doing for me today?”

It accounts for your specific mortgage terms, down payment amount, and actual expenses. Two investors buying identical properties with different loan terms will have different cash-on-cash returns — and that matters, because your financing directly affects what hits your bank account each month.

What’s a Good Cash-on-Cash Return?

Most investors target 8-12% for residential rentals. Below 8% and you start wondering if the hassle of being a landlord is worth it compared to index funds averaging 10%. Above 12% is excellent and usually means you found a deal or you’re in a high-yield market.

Here’s the benchmarking reality:

  • 4-6%: Typical in expensive coastal markets (LA, NYC, Seattle)
  • 8-10%: Common in mid-tier markets with decent prices
  • 12-15%: Strong deals in landlord-friendly markets
  • 15%+: Either a home run or you’re underestimating expenses

Calculating Cash-on-Cash Step by Step

Purchase price: $200,000. Down payment (20%): $40,000. Closing costs: $5,000. Initial repairs: $5,000. Total cash invested: $50,000.

Monthly rent: $1,600. Monthly expenses (mortgage, taxes, insurance, maintenance, management, vacancy reserve): $1,250. Monthly cash flow: $350. Annual cash flow: $4,200.

Cash-on-cash return: $4,200 / $50,000 = 8.4%. Decent, not spectacular. But remember — you’re also getting principal paydown, appreciation, and tax benefits on top of this.

Improving Your Cash-on-Cash Return

Put less money down (higher use), negotiate a lower purchase price, increase rents, or reduce expenses. Each one moves the needle. Refinancing into a lower rate mortgage also boosts cash-on-cash because it reduces your biggest monthly expense.

Model your own deals with our mortgage calculator, and check the buying guide for tips on finding high-yield properties. More metrics in the glossary.

Real-World Example

You buy a rental property for $300,000, putting $60,000 down and financing the rest. Annual rental income is $27,600. After all expenses including the mortgage payment, your annual pre-tax cash flow is $5,400. Your cash-on-cash return is $5,400 / $60,000 = 9.0%. Compare that to the cap rate of 6.4% on the same property — the difference comes from leverage. If you had paid all cash ($300,000), your return would be lower in percentage terms but you would have no mortgage risk. Cash-on-cash is the metric that shows what your actual invested dollars earn.

Run the Numbers

Use our cash-on-cash calculator to see how cash-on-cash return applies to your specific situation. Plug in your numbers and compare scenarios before making any financial commitments.

Related Terms

Understanding cash-on-cash return connects to several other concepts: Cap Rate, NOI, Equity, and Rental Yield. Each of these terms interacts with cash-on-cash return in ways that affect your buying power, monthly costs, or investment returns.

Frequently Asked Questions

What is a good cash-on-cash return for rental property?

Most investors target 8-12% for residential rentals. Below 6% often signals you are overpaying or the market is too expensive for cash-flow investing. Above 15% typically means the property carries significant risk — high vacancy, deferred maintenance, or a declining neighborhood.

Does cash-on-cash return account for appreciation?

No. Cash-on-cash only measures annual pre-tax cash flow relative to total cash invested. It ignores appreciation, principal paydown, and tax benefits. For a complete picture, investors use internal rate of return (IRR), which captures all sources of profit over the hold period.