What cash-on-cash return measures
Cash-on-cash return is the annual pre-tax cash flow a property produces divided by the cash you actually invested to acquire it. If a rental throws off $7,200 of cash flow a year after the mortgage and you put in $90,000 of down payment, closing costs and rehab, your cash-on-cash return is 8%. It answers the question that matters most to a leveraged buyer: what is each dollar I invested earning right now? Because it uses cash in and cash out — not the full purchase price — it reflects the effect of your financing directly.
Why leverage changes everything
A mortgage lets you control a large asset with a small slice of cash, which can magnify returns. Two investors can buy the identical building at the same cap rate yet earn very different cash-on-cash returns depending on how much they borrow and at what rate. More leverage usually lifts cash-on-cash return while rates are below the cap rate, but it also raises risk: a vacancy or rate rise bites harder when the mortgage is large. Cash-on-cash return is where the trade-off between using other people's money and taking on debt becomes visible in a single number.
Counting every dollar you invest
The 'cash invested' figure is where mistakes creep in. It should include the down payment, closing costs, lender fees and any upfront rehab or make-ready spending — everything you paid out of pocket to get the property rented. Leaving out closing costs or renovation flatters the return. On the cash-flow side, use realistic operating expenses and a vacancy allowance, and make sure the mortgage figure is the full annual principal-and-interest payment. Feeding in honest numbers on both sides is what turns this from a sales pitch into a decision tool.
Reading the result in context
There is no single target cash-on-cash return; many buy-and-hold investors look for something in the mid-single digits to low double digits, but it depends on market, risk and strategy. A low or negative figure means the property costs you money to hold each month, which can still make sense if you expect strong appreciation — but you should choose that consciously. Compare the return against safer alternatives and the deal's risk. These tools use standard, published real-estate formulas and the figures you enter. They are estimates for planning and comparison, not financial, investment or tax advice — run your own numbers and speak to a qualified professional before you buy.
Frequently asked questions
How is cash-on-cash return calculated?
Cash-on-cash = annual pre-tax cash flow ÷ total cash invested × 100. Cash flow is rental income minus operating expenses minus mortgage payments; cash invested is down payment plus closing costs plus rehab.
What is a good cash-on-cash return?
Many buy-and-hold investors target roughly 6–12%, but there is no fixed rule. It depends on your market, risk tolerance and whether you're counting on appreciation too.
How is cash-on-cash different from cap rate?
Cap rate ignores financing and divides NOI by the full price. Cash-on-cash divides cash flow after the mortgage by only the cash you actually invested, so it reflects leverage.
Should closing costs count as cash invested?
Yes. Include the down payment, closing costs, lender fees and any upfront rehab. Leaving them out overstates your return and makes weak deals look better than they are.