Cash on cash return formula
Cash-on-cash return is annual before-tax cash flow divided by the equity (cash) invested, expressed as a percentage; it is also called the equity dividend rate.[1]
- Annual pre-tax cash flow is net operating income minus the year's mortgage payments (principal and interest).
- Total cash invested is everything that came out of your pocket to buy the property and make it rentable. This calculator counts the down payment, closing costs and initial repairs. The CFPB puts typical closing costs at 2% to 5% of the purchase price.[2]
Example from the worksheet: NOI of $16,830 minus $14,593 of payments leaves $2,237. Divided by $75,000 invested, that is 2.98%.
How leverage changes cash-on-cash
Borrowing raises the cash-on-cash return only when the property earns more on its price than the loan costs to carry. The same property, at four down payments:
| Down payment | Cash invested | Annual cash flow | Cash-on-cash |
|---|---|---|---|
| All cash | $262,500 | $16,830 | 6.41% |
| 50% | $137,500 | $7,101 | 5.16% |
| 25% | $75,000 | $2,237 | 2.98% |
| 20% | $62,500 | $1,264 | 2.02% |
The test is the loan constant: the year's payments divided by the loan amount. At 6.75% over 30 years it is 7.78%, above the 6.73% cap rate (a loan constant always exceeds the interest rate[3]), so every extra borrowed dollar pulls the cash return down. With a loan constant below the cap rate, the order reverses. Lenders also limit how much you can borrow on an investment property; Fannie Mae's eligibility matrix allows up to 85% loan-to-value on a one-unit investment purchase and 75% on two to four units, against up to 97% for a one-unit home you live in.[4]
Cash-on-cash vs cap rate vs ROI
| Measure | Numerator | Denominator | Includes the loan? |
|---|---|---|---|
| Cap rate | NOI | Price or value | No |
| Cash-on-cash | Cash flow after debt service | Cash invested | Yes |
| ROI / IRR | Cash flow + loan paydown + sale profit | Cash invested | Yes, over the whole holding period |
The cap rate vs cash-on-cash guide works through one property with four loans. Cash-on-cash is a year-one cash measure. It leaves out loan paydown, appreciation and tax effects, so two properties with the same cash-on-cash can produce very different total returns. It also says nothing about risk, and all investments carry some.[5]
Common mistakes
- Leaving out closing costs or repairs. Using only the down payment overstates the return.
- Counting taxes and insurance twice. If they are in operating expenses, do not add them to the mortgage payment as well.
- Skipping vacancy and reserves. A return based on 12 full months and no repairs is a best case, not a forecast.
- Comparing with a cap rate. The two answer different questions; see the table above.
For itemized expenses use the rental property calculator; to check whether the rent covers the loan, use the DSCR calculator; for a property you refinance after renovating, the BRRRR calculator measures cash-on-cash on the cash left in the deal.
Frequently asked questions
What is cash on cash return?
Cash-on-cash return is the year's before-tax cash flow from a property, after mortgage payments, divided by the cash you invested in it. It measures the yield on your own money, not on the full price.
What is a good cash-on-cash return?
It depends on what else you could earn on the same cash, on how much risk the property carries and on how much work it takes. Compare it with your alternatives rather than with a fixed target.
Is cash-on-cash return the same as ROI?
No. Cash-on-cash covers one year of cash flow. ROI usually includes loan paydown and the profit on a sale as well.
Does cash-on-cash include appreciation?
No. It only counts the cash the property paid out during the year.
Can cash-on-cash return be negative?
Yes, when the mortgage payments exceed NOI. You are then adding cash each month to hold the property.