How Do You Calculate Cash-on-Cash Return?
Divide annual pre-tax cash flow by total cash invested. Annual cash flow equals gross rent minus vacancy, operating expenses, and annual mortgage payments. Cash invested includes down payment, closing costs, and any upfront repairs. If you invested $60,000 and the property generates $5,400 net cash after all expenses and mortgage, your cash-on-cash return is 9%. A positive number means the investment pays you each year.
What Is a Good Cash-on-Cash Return?
Most investors target 6% to 10% or better cash-on-cash return on rental properties. In expensive markets with low cap rates, even 3% to 5% may be acceptable if appreciation is the primary strategy. In cash-flow-focused markets, investors often won't buy below 8% to 10%. Compare cash-on-cash return to alternative investments like dividend stocks or REITs to evaluate whether the risk of direct ownership is justified.
What Are the Limits of Cash-on-Cash Return?
Cash-on-cash measures current cash income only — it ignores equity buildup from loan paydown and property appreciation, which can represent significant returns over time. It also doesn't reflect tax benefits from depreciation. The most accurate analysis combines cash-on-cash with total return calculations that include equity growth and long-term appreciation alongside current income.
Frequently asked questions
Can cash-on-cash return be negative?
Yes. A negative cash-on-cash return means operating expenses and mortgage payments exceed rental income — the property costs you money each month. Some investors accept this if they anticipate strong appreciation, but negative cash flow adds risk and requires reserves to sustain.
How does leverage affect cash-on-cash return?
Leverage amplifies returns when cash-on-cash exceeds the mortgage rate. If a property yields 8% cap rate and you borrow at 6%, leverage boosts your return on invested capital. However, leverage also amplifies losses if the property underperforms or values decline.