Cash-on-cash return

Before you rely on it

What to check

Get every dollar of cash invested into the denominator, including closing costs and up-front repairs.

The common error

Where people go wrong with cash-on-cash return

Counting only the down payment. Leaving out closing costs and initial work overstates the return, sometimes by several percentage points, on the exact number the decision turns on.

Worked through

Cash-on-cash return in plain numbers

You buy a rental for $300,000 with 25% down, so $75,000, and $5,000 in closing costs. Cash invested is $80,000. The property earns $24,000 a year in net operating income, and the mortgage payments total $16,800. Cash flow before tax is $24,000 − $16,800 = $7,200. Cash-on-cash return is $7,200 ÷ $80,000, or 9.0%. Put 40% down instead, so the loan shrinks to $180,000 and debt service falls to about $13,440. Cash flow rises to $10,560. But cash invested climbs to $125,000, so the return slips to 8.4%. Debt moves the number in both directions.

Easily confused

Cash-on-cash return and its neighbours

Cash-on-cash return is not the cap rate and not the total return; the cap rate ignores financing and compares the property alone. Cash-on-cash uses the cash you actually put in and the cash you actually receive after debt payments, so it reflects your loan. Total return adds appreciation and principal paydown, which cash-on-cash leaves out, and the internal rate of return includes the timing of every cash flow, including the sale. Each answers a different question, and a property can look strong on one and weak on another.

In real decisions

Where cash-on-cash return turns up

Investors use it to compare rental deals that are financed differently; it answers how hard the invested cash is working in the first years; lenders and partners ask for it when reviewing a proposal. It also helps a buyer decide whether extra down payment is worth it, since more equity lowers debt service but raises the base. Many investors set a minimum acceptable figure, then see which deals clear it. It is quick to calculate and easy to explain, which is why it appears in almost every rental analysis.

Know the edges

Where cash-on-cash return stops being reliable

The figure covers one year and ignores growth in rent, changes in expenses and the eventual sale; it excludes taxes, and it can flatter a deal with large capital needs later, such as a new roof. Vacancy and repair assumptions matter a lot. A high number based on optimistic rent is not reliable, and use conservative inputs, test a few scenarios and look at the multi-year return as well before committing money.

Quick answers

What people ask about cash-on-cash return

Is cash-on-cash the same as ROI? Not quite. It measures pre-tax cash flow against cash invested in the first year. ROI can include appreciation and principal paydown over time. Use both for a fuller picture.

What is a typical target? Investors set their own hurdles, often above what a safe alternative pays, and they vary with risk and market. Compare with the return on other uses of the same cash.