Measure the first-year pre-tax return on the cash you actually put into a rental, including down payment, closing costs and rehab.
Cash-on-cash return answers one question: for every dollar you took out of your bank account to buy a rental, how many cents come back each year as cash flow before income tax?
It is the metric most small landlords use to compare a leveraged property with a CD, an index fund or another deal, because it reflects your actual financing rather than the property in isolation.
Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested.
Annual pre-tax cash flow is net operating income minus a year of mortgage principal and interest.
Total cash invested is the down payment plus buyer closing costs, rehab or make-ready spending, and any other money you put in upfront such as loan points, furnishing or reserves you set aside.
Leaving closing costs and rehab out of the denominator is the most common mistake, and it can overstate the return by several percentage points.
A $250,000 rental bought with 20% down needs $50,000 down, $7,500 of closing costs and $15,000 of rehab, so total cash invested is $72,500.
Rent of $2,500 a month is $30,000 a year.
After a 5% vacancy allowance, collected rent is $28,500.
Maintenance, management and a capital reserve at 21% of collected rent cost $5,985, and taxes plus insurance add $4,200, so NOI is $18,315.
The $200,000 loan at 7% for 30 years costs $15,967 a year.
Cash flow is $2,348, and the cash-on-cash return is 3.24%.
If the investor ignored the rehab and closing costs, the same deal would look like a 4.7% return.
Many rental investors look for 8% to 12% cash-on-cash in the first year, while buyers in expensive coastal markets often accept 2% to 5% in exchange for expected appreciation.
There is no universal benchmark: compare the result with what the same cash could earn elsewhere at similar risk, and remember that a high return built on an optimistic rent or a zero repair budget is not a real return.
Cap rate divides NOI by the purchase price and ignores financing, so it compares properties. Cash-on-cash return includes the mortgage, so it compares your deal structure. Total ROI adds principal paydown, appreciation and tax benefits such as depreciation, which cash-on-cash deliberately leaves out. When leverage costs more than the cap rate, more debt lowers cash-on-cash return. That is why the DSCR and cap rate figures appear next to the return here.
Limits of the metric. Cash-on-cash return is a first-year, pre-tax snapshot. It does not account for rent growth, refinancing, a future sale or the time value of money, and it ignores that rental income and expenses are reported on Schedule E with depreciation deductions (IRS Publication 527). For multi-year decisions, pair it with an internal rate of return analysis.
Common questions about the Cash on Cash Return Calculator
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