How to calculate cash on cash return
Cash on cash return measures the yearly cash a property pays you against the cash you put in.
The formula
Cash on cash return = yearly pre-tax cash flow ÷ total cash invested × 100
Worked example
A rental that produces $6,000 a year after the mortgage, on $75,000 of cash invested, returns 8%.
How to use this calculator
Enter the yearly pre-tax cash flow, which is the money left after operating expenses and loan payments. Then enter the down payment, closing costs and repairs, which the calculator adds up as your total cash invested. The cash on cash return calculator divides the cash flow by that total. It also shows the cash flow per month and the years to earn back your cash.
What the result means
An 8% result means each $100 you put in pays you $8 of cash in a year, before income tax. A result of 0% means the rent only covers the property’s costs and loan payments. It covers one year and cash only. It says nothing about the property’s change in value or the loan balance you pay down. Compare it with what the same cash could earn in another deal or another investment with similar risk.
More examples
Where the numbers come from
Here is one way to arrive at the figures in the worked example. You buy a $250,000 rental with $50,000 down, $7,500 of closing costs and $17,500 of upfront repairs. Cash invested is $50,000 + $7,500 + $17,500 = $75,000.
The $200,000 loan, at an example rate of 6.5% over 30 years, costs $1,264.14 a month, or about $15,170 a year. If net operating income is $21,170, cash flow is $21,170 − $15,170 = $6,000. $6,000 ÷ $75,000 = 8%.
The same property at different cash flows
| Yearly cash flow | Cash invested | Cash on cash return |
|---|---|---|
| $4,500 | $75,000 | 6% |
| $6,000 | $75,000 | 8% |
| $7,500 | $75,000 | 10% |
With and without a loan
Buy the same property with no loan and you invest $250,000 + $7,500 + $17,500 = $275,000. There are no loan payments, so cash flow equals the $21,170 of net operating income. $21,170 ÷ $275,000 = 7.7%. In this example the loan lifts the return from 7.7% to 8%. A higher interest rate could push it the other way.
The gap is small because the loan costs about 7.6% of its balance a year in payments, close to the 7.7% the property earns without a loan.
What changes the result
- Rent and vacancy. A $125 change in monthly cash flow is $1,500 a year, which moves the example by two percentage points.
- Interest rate. A higher rate raises the loan payment and lowers cash flow.
- Down payment. More cash down lowers the payment but raises the cash invested.
- Upfront costs. Closing costs and repairs add to the cash invested and lower the return.
Common mistakes
- Counting only the down payment and leaving out closing costs and upfront repairs.
- Using net operating income as cash flow when there is a loan.
- Leaving out vacancy, repairs or management from expenses.
- Judging a deal on year one alone when rents, taxes and insurance will change.
Related calculators
Build the income figure with the NOI calculator. Compare the property without financing using the cap rate calculator. The DSCR calculator shows how comfortably the income covers the loan. Results are estimates, not financial advice.
Frequently asked questions
What counts as cash invested?
Down payment, closing costs and upfront repairs.
How is it different from cap rate?
Cap rate ignores the loan. Cash on cash includes it.
Does it include appreciation?
No. It measures cash flow only. See the ROI calculator.
Is cash on cash return before or after tax?
Before. The formula uses pre-tax cash flow, so your income tax is not included.
Can cash on cash return be negative?
Yes. If operating expenses and loan payments are more than the rent you collect, cash flow is negative and so is the return.
Does paying down the loan count?
No. The full loan payment is subtracted from cash flow. The part that reduces your balance builds equity, but it is not cash in your pocket.
What is a good cash on cash return?
There is no single number. It depends on the risk, the market and what else you could do with the cash. Compare similar deals on the same basis.