How to calculate cash-on-cash return for a rental property

What is cash-on-cash return?

Cash-on-cash return (or CoC) is one of the most common metrics used to assess the performance of a rental investment property. Simply put, cash-on-cash return shows the % return generated against your total initial out of pocket costs. It's expressed as the ratio of your annual net cash flow to the total amount you invested up front. Below we'll walk through how to calculate this important metric, walking you through an example scenario.

How to calculate cash-on-cash return for a rental property

We can write the formula as follows:

Cash-on-cash return = annual net cash flow / total initial cost of out pocket

Example: calculating cash-on-cash return for a single-family rental investment property

So, imagine we find a property for sale for $100,000 and take out a loan to purchase it. We put 20% down, or $20k. In addition to the money we put down on the loan, we have to pay closing costs and suppose we also do some minor rehab to the property before renting it out, running us a total out of pocket cost of $38,285.71.

Next, we rent the property out and calculate our annual net cash flow (the money we earn from the rental, net of all expenses) as follows:

Monthly Income:

Total monthly income: $1,400

Monthly Expenses:

Total monthly expenses: $996.03

So, our monthly net cash flow is simply:

This means that, net of all expenses needed to run the property, we can expect to return a profit (net cash flow) of:

So, plugging these numbers back into our formula above, we can calculate the cash-on-cash return as:

Finally, it's worth noting that this is just the return for our first year owning the property, as the years expand we can expect this return will slowly increase as rent increases typically outpace expenses (meanning our net cash flow will increase).

What is considered a good cash-on-cash return for a rental property?

This number will really vary depending on the specific investor and property that they're looking at. Also, note that short-term rentals generally will be expected to generate a higher cash-on-cash return compared to long-term single family rentals (since short-term rentals are more volatile in terms of occupancy and also can produce more work dealing with a larger number of tenants in a given month / year).

We typically will look for properties with at least 7% cash-on-cash return for long-term single family residential real estate investing (8-12% is considered 'good' by many). Of course, the higher the better. It's also important to keep in mind we personally like to use conservative/high assumptions around expenses and can also expect some additional appreciation in property value over the long-term which would be tacked on when looking at the total ROI of the property. This % return should be high enough to compete with the typical 7% benchmark return generated by investing in equity indices.

There are other important factors that can sway the % cash-on-cash return you may consider 'good' as well, such as the expected appreciation of the home relative to the overall market (e.g. is it in a 'hot' area expected to grow in value quickly), the overall ease of renting it out, proximity to other investment properties you may own (things such as maintenance and property management can be more convenient when co-located), and plenty more.