Cash-on-cash return measures the annual before-tax cash flow generated by a property divided by the total cash you’ve invested, expressed as a percentage. It’s a straightforward way for investors to see how much cash income they earn relative to their out-of-pocket investment.
Unlike metrics that factor in property value or appreciation, cash-on-cash return focuses solely on actual cash flow. It helps investors compare financing strategies, gauge short-term performance and prioritize deals that meet their income goals.
The numerator is your property’s net operating income minus debt service. In other words, total rent collected less operating expenses (taxes, insurance, maintenance, vacancy) and mortgage payments.
Total cash invested includes your down payment, closing costs, renovation budgets and initial reserves. This figure represents the true cash commitment required to acquire and stabilize the property.
Always deduct recurring costs that directly impact your cash flow: mortgage interest, property taxes, insurance premiums, routine maintenance and a vacancy allowance (5–10%).
Do not include principal pay-down, property appreciation or non‐cash depreciation. These factors affect overall return but not your immediate cash yield.
Separate one-time expenses (major repairs, initial renovations) from recurring line items. Include one-time costs in total cash invested but exclude them from annual operating expenses when calculating cash flow.
Cap rate uses net operating income over property value, ignoring financing. Cash-on-cash focuses on your actual cash outlay and debt service.
Total ROI includes appreciation and equity build-up, while IRR incorporates time value of money and eventual sale proceeds. Cash-on-cash return is purely year-one cash yield.
Use cash-on-cash for quick yield comparisons, cap rate for unleveraged valuation snapshots, and IRR or total ROI for full investment lifecycle analysis.
Typical targets range from 8%–12% for most residential and multi-family assets. Commercial properties may command higher yields (10%–15%) depending on lease structure and tenant quality.
Urban markets often yield lower cash-on-cash (5%–8%) due to higher purchase prices. Suburban or emerging markets can deliver 10%–12% or more, but with potentially higher risk.
Define a minimum acceptable return based on your risk tolerance, financing terms and alternative investment opportunities. A common hurdle rate is 8%–10% cash-on-cash.
It ignores long-term equity growth, market appreciation and tax shelters like depreciation. Use it in conjunction with other metrics for a holistic analysis.
Don’t assume 100% occupancy or maximum rents. Build in conservative vacancies and realistic rent escalations to avoid overstating cash flow.
If initial cash-on-cash is negative, consider strategies like increasing rents, reducing expenses, refinancing to better terms or injecting additional capital reserves.
An investor buys a four-plex for $400,000 with a 20% down payment ($80,000), $5,000 closing costs and $5,000 in reserves. Total cash invested: $90,000.
Gross rent: $48,000/year. Operating expenses (taxes, insurance, maintenance, vacancy): $18,000. Net operating income: $30,000. Annual debt service: $14,400. Pre-tax cash flow: $15,600.
Cash-on-cash return = $15,600 ÷ $90,000 × 100 = 17.3%. Lesson: leveraging with debt can boost your cash yield, but be mindful of payment shocks and reserves.
Yes. Include one-time fees—closing costs, renovation budgets and initial reserves—in your total cash invested to get an accurate return baseline.
Recalculate annually or after any major expense change (renovation, refinance, rent reset) to ensure your investment still meets your yield targets.
They’re useful for quick estimates, but always verify inputs. Customize categories to match your actual financing terms, expense ratios and vacancy assumptions.
Cash-on-cash return is your go-to metric for measuring year-one cash yield relative to actual cash outlay. It’s simple, transparent and ideal for comparing leveraged deals.
Use a standardized spreadsheet to calculate cash-on-cash for every prospective deal. Filter out properties below your hurdle rate before diving into deeper analysis.
Explore advanced courses on real estate finance, join investor forums and consult with mortgage brokers or accountants to refine your assumptions and optimize returns.
