Cash on cash return: how to calculate it for a rental

The short answer: cash on cash return tells you how hard the money you actually put into a rental is working: the property's yearly cash flow divided by the cash you invested.

• Formula: annual pre-tax cash flow ÷ total cash invested × 100
• Cash flow: income minus operating expenses minus debt service
• Cash invested: down payment, closing costs and upfront repairs
• It leaves out principal paydown, appreciation and tax benefits
• Next step: Plan it with the Rental Property Tracker ($11.99).

Cash on cash return tells you how hard the money you actually put into a rental is working. It is the property's yearly cash flow divided by the cash you invested. Investopedia's guide to cash-on-cash return describes it as the annual return on the cash invested, separate from the full price of a property bought with a loan. Below is the formula, a full worked example, what counts as a good number, and how it differs from cap rate and ROI.

The cash on cash return formula

Cash on cash return = annual pre-tax cash flow ÷ total cash invested × 100.

What counts as cash invested

Count every dollar that left your pocket to buy the property and get it rented. That includes the down payment, lender fees, title and escrow charges, inspection and appraisal fees, loan points, upfront repairs, appliances and the first months of carrying costs before a tenant moves in. Do not count money the lender covered. If you add cash later for a major improvement, add it to cash invested when you recalculate.

Worked example

You buy a single-family rental for $250,000 with 25% down.

The math: $26,400 minus $8,400 minus $14,969 is about $3,031. Divide by $75,000 and you get about 4.0%.

How the numbers move

Two lessons stand out. Small rent changes move the return a lot. And at a 7% mortgage rate, borrowing more lowered this deal's cash on cash return, because the loan costs more than the property earns on its price. Leverage helps only when the property's yield beats the cost of the debt.

What each return means in dollars

Using the $75,000 of cash invested in the example above, here is what different cash on cash returns would look like each year before taxes:

Seeing the dollars helps you compare a rental with other uses of the same cash, such as a savings account or Treasury bills, and shows how much rent or expense changes it takes to move from 4% to 8%.

What is a good cash on cash return?

There is no official standard. Many rental investors aim for roughly 8% to 12%. In high-priced cities, buyers often accept 4% to 6% because they expect rents and values to rise. Ask yourself three things:

1. What could this cash earn with less work and risk, such as in a high-yield savings account or Treasury bills?
2. Did you include realistic vacancy and repairs?
3. Will the return hold if rates, taxes or insurance go up?

A 4% return with a large repair reserve may be safer than a 10% return built on optimistic rent.

Comparing two deals

Cash on cash return is most useful side by side. Suppose you have $75,000 to invest and two options:

Property B pays more cash now. Property A may grow more in value and need fewer repairs. Cash on cash return does not pick the winner for you. It shows the trade-off clearly, so you can decide whether expected growth is worth less cash each year.

Strengths and limits

Investors like cash on cash return because it is simple, uses real dollars and reflects the loan you will actually get. It answers a practical question: will this property put money in my pocket?

Its limits matter just as much. It covers one year at a time, so it says nothing about later rent growth or a big repair in year five. It ignores equity you build by paying down the loan, and any change in value. And it depends on your estimates, so a careless expense list makes the number meaningless. Use it with cap rate, a long-term cash flow projection and a careful inspection.

Multifamily and short-term rentals

For a duplex or small apartment building, add rent from every unit and expenses for the whole building, including shared utilities and common-area upkeep. Vacancy on one unit hurts less than on a single-family home, which is one reason small multifamily properties appeal to new investors.

Short-term rentals need more careful numbers. Income swings by season, and costs include cleaning, platform fees, furnishings, supplies and higher insurance. Count furniture and setup costs in cash invested. Use a conservative occupancy rate, and check local rules, since many cities limit short-term rentals.

Cash on cash return vs. cap rate

Use both. Cap rate tells you if the property is fairly priced. Cash on cash return tells you if your financing works.

Cash on cash return vs. ROI

Cash on cash return looks only at the cash you receive each year. A total return or ROI figure can add three more things:

• Principal paydown, the part of each mortgage payment that builds equity.
• Appreciation, if the property gains value.
• Tax benefits, mainly depreciation.

Investopedia notes that cash on cash return and ROI are often used interchangeably but differ when debt is involved. Keep them separate when comparing deals.

Depreciation and taxes

Cash on cash return is usually a pre-tax number. Your actual tax bill depends on depreciation and deductible expenses. IRS Publication 527 covers residential rental property, including which expenses are deductible, how to depreciate the building, and the difference between repairs and improvements. Residential rental buildings are generally depreciated over 27.5 years, and land is not depreciated. Depreciation lowers taxable income without costing cash, which is why after-tax returns can look better than pre-tax ones.

Cash on cash return after year one

Most investors calculate cash on cash return before buying, then never look again. The number changes every year. Rents usually rise, while taxes, insurance and repairs rise too. If your loan is fixed, your mortgage payment stays flat, so cash flow often improves over time. Recalculate each year with real figures. A falling return is an early warning that rent is below market or costs are creeping up.

Common mistakes

Before you buy: a quick checklist

1. Get real tax and insurance quotes, not estimates from the listing.
2. Ask for the current lease and rent history.
3. Price out repairs with a contractor before closing.
4. Run the numbers at today's rate and at a rate 1% higher.
5. Recalculate cash on cash return with vacancy and reserves included.

Track the real number every year

Your projected cash on cash return is only a guess until the first year of real numbers comes in. The Rental Property Tracker ($11.99, Excel and Google Sheets) tracks up to 10 properties with a rent roll and lease-end alerts, an income and expense log, rent received per tenant per month with short or missed rent highlighted, cash flow by month and property, and category totals for tax time. Divide a year's cash flow by your cash invested and you have the actual return.

See also how to track rental property income and expenses.

To track the rent that feeds this number, keep a rent roll template for each property.