Measure a rental's cash-on-cash return — the annual pre-tax cash flow divided by the cash you actually put in. This is the leveraged return investors live on.
Cash-on-cash = annual pre-tax cash flow ÷ total cash invested. It ignores principal paydown, appreciation, and tax benefits — it measures cash return on cash in only. Include a vacancy allowance in operating costs for realism. Not investment advice.
Cap rate ignores your mortgage; cash-on-cash return doesn't. It divides the actual annual cash left after all expenses and loan payments by the real cash you invested (down payment, closing, rehab). That's the number that tells a leveraged investor how hard their own money is working.
Cash-on-cash = annual cash flow ÷ total cash invested
Cash-on-cash return divides the cash a property leaves in your pocket over a year by the cash you invested to get it: annual pre-tax cash flow ÷ total cash invested. Cash flow is rent minus operating expenses minus the full mortgage payment. Cash invested is everything you put in up front: down payment, closing costs, lender fees, and rehab. It is the metric investors use to compare a financed rental against an index fund, a second business, or paying down a loan, because those alternatives are all measured on the same basis: what does a dollar earn here?
Rent $2,200, operating costs $600, mortgage $1,200, cash invested $75,000. Monthly cash flow is $400, so $4,800 a year, and cash-on-cash is $4,800 ÷ $75,000 = 6.4%. Cash payback, the time for the property to return your invested cash from cash flow alone, is $75,000 ÷ $4,800 = about 15.6 years. Whether 6.4% is good depends on the alternative: it beats a high-yield savings account, trails the stock market's long-run average, and comes with landlord work attached. That comparison, not a magic threshold, is how to judge the number.
Three real sources of return are missing from the formula on purpose. Principal paydown: on the loan implied by a $1,200 payment at 7%, the tenant pays down roughly $1,800–$1,900 of principal in the first year, which adds about 2.5 points to the total return on $75,000. Appreciation, which is real over long periods and unreliable over short ones. Tax benefits: depreciation on the building shelters much of that $4,800 from income tax. Together they can double the “total return” on a 6.4% cash-on-cash deal. The reason investors still lead with cash-on-cash is that it is the only one of the four you can spend this year. A property with strong paper returns and negative cash flow is a property you are paying to own, and negative cash flow is what forces sales at the worst time.
Cash-on-cash is year-one math. If you want the after-tax version with depreciation, the effect of a rent bump in year two, or the year the refinance returns your cash and sends cash-on-cash toward infinity (the BRRRR outcome), a one-line calculator cannot show it. That is the point at which the deal analyzer below earns its price.
No — it's pure cash flow on cash invested. Appreciation, principal paydown, and tax benefits are real returns too, just not captured here. Add them for a total-return view.
Many look for 8%+ cash-on-cash, but it varies with market and strategy. A low-cash-flow deal can still win on appreciation — know which game you're playing.
Related: cap rate calculator · rental yield calculator · real estate ROI calculator · all free calculators.
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