How to calculate cash-on-cash return
Cash-on-cash return measures a year's cash flow against the cash you put into a property. It includes the effect of financing, unlike cap rate.
The formula
Cash-on-cash return = annual cash flow ÷ upfront cash × 100.
In the analyzer, cash flow is what remains after vacancy, operating expenses, capital reserves and mortgage principal and interest. Upfront cash includes your down payment, closing costs and initial renovations.
A worked example
For a $150,000 purchase with 25% down:
- Down payment: $37,500
- Closing costs at 4% of price: $6,000
- Initial renovations: $10,000
- Total upfront cash: $53,500
At $2,000 monthly rent, the example produces $1,250 monthly NOI. Deduct $200 in capital reserves and a $786.62 mortgage payment (7.5% interest, 30 years) to get $263.38 monthly cash flow.
Using unrounded monthly figures, annual cash flow is $3,160.60. Cash-on-cash return = $3,160.60 ÷ $53,500 × 100 = 5.91%.
Use the cash to close calculator to organize the settlement payment, initial work and money kept in reserve. Its cash budget includes reserves, which are separate from the upfront costs used in the return calculation above.
Work backward from a target return
If you have a return target in mind, use the maximum offer price calculator to find the price that meets it under your rent, financing and expense assumptions.
The cash versus mortgage comparison shows why more monthly cash flow does not always mean a higher cash-on-cash return. Paying cash changes both the annual cash flow and the cash invested.
Keep equity separate
Mortgage principal payments build equity but are not cash you can spend. This example also pays down $1,037.06 of principal in Year 1. The analyzer shows principal paydown separately and as part of a combined cash plus equity return.
If upfront cash is zero, cash-on-cash return is undefined. Cash flow can still be calculated. Purchase-time operating reserves, income taxes, appreciation and sale costs are outside this cash-on-cash calculation.
Try these figures in the free property analyzer
Example figures are rounded; calculations use full precision.