Cash-on-Cash Return: Formula, Example and What's a Good Number

The formula

Cash-on-cash return = Annual pre-tax cash flow / Total cash invested

Annual cash flow is what's left from the rent after every expense and the mortgage payment. Total cash invested is the down payment, closing costs and any repairs you paid for out of pocket.

An example

You buy a US$150,000 house with 20% down (US$30,000) plus US$4,500 in closing costs, so you've put in US$34,500. After the mortgage, tax, insurance, vacancy, repairs and management, the house leaves about US$2,500 a year in your pocket.

US$2,500 / US$34,500 is about 7.3%.

What counts as a good number

Many investors aim for 8% to 12%. At the 7% interest rate we assume by default, a lot of listings come in below 8%, which is why finding one that clears the bar means screening many of them. Our free market report uses 8% as its default bar.

Your target depends on how much risk you'll take and what else you could do with the money. A return of 6% from a stable house in a growing area can beat 12% from a risky one.

How it differs from cap rate

Cap rate leaves the loan out, so two buyers of the same house get the same figure. Cash-on-cash includes the loan, so they don't.

What it leaves out

• Appreciation. If the house gains value, that's extra return you aren't counting here.
• Principal paydown. Part of each mortgage payment builds your equity, and it's not counted as cash flow.
• Taxes and depreciation. The figure is pre-tax.
• Time. It's a one-year snapshot. Rents and expenses change.

Common mistakes

Leaving out vacancy and repairs is the usual one, and it makes a deal look better than it is. Using the listing's rent estimate without checking it against real comparable rentals is another. Forgetting closing costs from the cash invested inflates the percentage.

Related reading

The step-by-step guide walks through the calculation with a full example. To get yours in seconds, use the calculator.