Cash-on-cash return calculator
Cash-on-cash return compares the cash a rental puts in your pocket each year with the cash you paid to buy it. It is the number that tells you how hard your own money is working once the loan is counted.
Cash-on-cash return
4.84%
Thin: little cushion for surprises
- Net operating income, yearly
- $22,320
- Loan payments, yearly
- − $17,963
- Cash flow before tax
- $4,357
- Down payment
- $75,000
- Closing costs and repairs
- $15,000
- Total cash invested
- $90,000
How it is calculated
Cash-on-cash return = Annual pre-tax cash flow ÷ Total cash invested
- Annual pre-tax cash flow
- Net operating income for the year minus the year’s mortgage payments.
- Total cash invested
- Down payment plus closing costs plus any repair or renovation money spent up front.
Worked example
- You buy a $300,000 rental with 25% down ($75,000), pay $6,000 in closing costs and spend $9,000 on repairs. Total cash invested is $90,000.
- Rent is $2,800 a month. After 5% vacancy and $800 a month of operating expenses, net operating income is $22,320 a year.
- The $225,000 loan at 7% over 30 years costs $1,496.93 a month, or $17,963 a year. Cash flow is $22,320 − $17,963 = $4,357.
- $4,357 ÷ $90,000 = 4.84% cash-on-cash return.
What is a good cash-on-cash return?
Many rental investors look for somewhere between 8% and 12%, but the range people accept moves with interest rates and with the market. When borrowing is expensive, returns on financed deals fall, and buyers in fast-appreciating cities often accept low single digits because they expect the gain to come from price growth.
A helpful test is to compare the result with what the same cash would earn elsewhere with less work, such as a savings account or an index fund. A rental should pay you more than those for the effort and risk of owning it.
Cash-on-cash return covers one year and leaves out loan paydown, appreciation and tax effects. It answers the cash flow question only.
Common questions
How is cash-on-cash return different from cap rate?
Cap rate ignores financing and divides income by the full price. Cash-on-cash return subtracts the mortgage payments and divides by only the cash you put in, so it changes with your down payment and interest rate.
Can cash-on-cash return be negative?
Yes. If mortgage payments and expenses are more than the rent collected, cash flow is negative and so is the return. That means you are paying out of pocket each month to hold the property.
Does a smaller down payment raise the return?
It can, because you invest less cash, but the larger loan also raises the monthly payment. When the interest rate is higher than the property’s cap rate, borrowing more lowers your return.
Is cash-on-cash return the same as ROI?
Not quite. Return on investment usually includes equity gained from paying down the loan and from appreciation. Cash-on-cash return counts only the cash received during the year.