Cash on Cash Return Calculator

The cash on cash return formula

Cash on cash return answers one question: for every dollar you pulled out of your own pocket to buy this rental, how many cents does it hand back each year before taxes? The math is a single division:

• Cash on cash return = annual pre-tax cash flow / total cash invested x 100
• Annual pre-tax cash flow = net operating income minus annual debt service (the full mortgage payment, principal and interest)
• Total cash invested = down payment + closing costs + rehab or make ready budget

Everything on the top of the fraction is an annual cash number, not an accounting one. Rent collected minus vacancy, operating expenses and the loan payment leaves the cash that lands in your account over a year. Depreciation, which is a paper deduction rather than a check you write, stays out. So does any change in the property's value, because you have not sold anything.

Because the bottom of the fraction is your own money, the same house produces a different cash on cash return for every buyer. A buyer who puts 40 percent down and one who puts 15 percent down, at the same price and the same loan rate, will report two different returns on the same property.

What counts as cash invested

The denominator is everything you paid out of pocket at closing, and leaving pieces out is the most common way this number gets flattered. The full list for a typical purchase:

For sizing the closing cost line, the Consumer Financial Protection Bureau's guide to figuring out how much to spend says closing costs typically run from 2% to 5% of the purchase price, not counting the down payment. On the $260,000 house used below, 3% is $7,800, which sits inside that range. The CFPB's guide to mortgage costs itemizes the categories: origination charges, points, appraisal and title services, government fees, and prepaid insurance and tax deposits.

The rehab line deserves honesty too. A rental that needs $6,200 of paint, flooring and hardware before it can be listed is a deal that cost $6,200 more than the sticker price, and the formula should see that money.

Worked example: a $260,000 rental at three rent levels

Take a single family rental with a $260,000 price, a 25% down payment of $65,000, closing costs of $7,800, and $6,200 of make ready work. That is $79,000 of cash invested. The other $195,000 is a 30 year loan at 6.5%, which costs $1,232.53 a month, or $14,790 a year.

Operating costs are property tax at $3,600 a year, insurance at $1,500, vacancy at 4% of rent, maintenance at 5% of rent, and management at 8% of rent. Run the same house at three rent levels and the returns spread out fast:

Walk the middle column end to end: $2,400 of monthly rent is $28,800 a year. Subtract $9,996 of operating expenses and the net operating income is $18,804. Subtract the $14,790 loan payment and the cash flow is $4,014. Divide by the $79,000 invested and the cash on cash return is $4,014 / $79,000 = 5.08%. The cap rate on the same column is $18,804 / $260,000 = 7.23%, and the gap between those two numbers is entirely the loan.

How borrowing moves the number

The loan does two things at once: it shrinks the cash you invested, and it takes a yearly bite out of your income. Which effect wins depends on one comparison. Divide the annual loan payment by the loan amount to get the mortgage constant: $14,790 / $195,000 = 7.58% here. If the mortgage constant is lower than the cap rate, borrowed money improves the cash on cash return. If it is higher, borrowing drags the return down below the all cash result.

The all cash version of the middle scenario puts $274,000 of cash in (price, closing costs and rehab) and earns the $18,804 of net operating income, a 6.86% return with no lender. The mortgaged version returns 5.08%, because the loan costs 7.58% while the property only yields 7.23% on price. In the $2,700 column the yield is 8.38%, the spread turns positive, and financing lifts the return from 7.95% all cash to 8.86% with the loan.

Since the constant depends on the rate and the term, it is worth having the per thousand payment in your head:

A property that caps at 7% supports cheap debt and hurts with expensive debt. That single comparison, cap rate versus mortgage constant, tells you before you apply for the loan whether financing is your friend on this deal.

Cash on cash return vs cap rate and ROI

All three metrics get called "return" and none of them answers the same question. The cap rate deliberately ignores how you paid for the property, so it measures the building. The cash on cash return deliberately includes the financing, so it measures your deal. Return on investment is the widest lens of all, because it waits until the end and counts everything.

The practical order of operations: screen the building with the cap rate, because it is financing free and comparable across listings. Then run the cash on cash return with your actual loan terms, because a 7% cap rate building can be a 1% cash deal at the wrong rate. Only ROI can tell you how the whole episode went, and it cannot tell you until you have sold or refinanced.

Taxes and depreciation stay out of the math

The formula is explicitly pre-tax, and that is a feature rather than an oversight. Tax outcomes depend on your bracket, your other income and elections that change over the years you hold the property, so folding them in would make the metric impossible to compare across buyers.

Depreciation is the item people ask about most, because it is the largest paper deduction in rental real estate. Under IRS Publication 946 (2025), residential rental property is recovered straight line over 27.5 years, with the mid-month convention applying in the year you place it in service. The companion guide, IRS Publication 527 on residential rental property, covers how rental income and expenses are reported each year. On this example, if $208,000 of the $260,000 price is allocated to the building, the annual deduction is $208,000 / 27.5 = about $7,564. That deduction can easily turn the $4,014 of positive cash flow into a tax loss on paper, which is exactly why it belongs in an after-tax analysis and not in this formula. The cash on cash return stays $4,014 / $79,000 either way, because no $7,564 check changed hands.

The first year is also its own case: the mid-month convention treats the property as placed in service at the middle of whatever month you closed, so a November purchase gets a half month of depreciation that year. The yearly tables in Publication 946 list the opening year rate for each month, and for a property placed in service in year one they run well under the full 3.636 percent annual straight line rate. A tax preparer applies those rules; this calculator stays on the cash side of the ledger.

What a good cash on cash return looks like

There is no official benchmark for this number, so treat any threshold as a screening habit rather than a rule. That said, the range individual landlords commonly work with is 5% to 10% pre-tax: deals under 5% often mean the financing is eating the yield, while double digit figures usually trace to a small down payment, a bargain purchase, or a rent estimate that has not met a tenant yet.

Three cautions keep the number honest. A high return built on a tiny down payment is also a high loan to value position, which magnifies a vacancy the same way it magnifies the yield. A return computed on the seller's rent roll is a forecast, not a result, until you have signed leases. And the metric says nothing about the principal you are paying down: in this example, the first year of the $195,000 loan retires about $2,180 of principal, which is forced savings the formula deliberately ignores.

Use the number comparatively. The same house at 5.08% matters because the alternative use of that $79,000, a treasury bill or an index fund, has a number too. The metric earns its keep as the left side of that comparison.

Rent trends are worth watching alongside the return, because the rent line is the biggest lever in the whole formula. The Bureau of Labor Statistics tracks rent of primary residence and owners' equivalent rent as two of the largest parts of the consumer price index, with shelter carrying about 35.6 percent of the basket. Rent that lags inflation quietly erodes a cash on cash return set in year one.

Four ways the number goes wrong

Forgetting the closing costs. Drop the $7,800 of closing costs and $6,200 of rehab from the example and the denominator falls from $79,000 to $65,000, which lifts the return from 5.08% to 6.17% without anything real changing. Count every dollar you wired at closing.

Using gross rent on top. Dividing cash flow by cash invested is the formula; dividing it into rent collected instead of cash flow double counts nothing but hides the debt service and the expenses, and produces a number that looks like a yield but is not comparable to anything.

Skipping vacancy. At 100% occupancy the middle scenario shows $5,166 of cash flow, a 6.54% return. At a realistic 4% vacancy the rent is $1,152 lower and the return drops to 5.08%. The difference between a full building on a spreadsheet and a leased one is the whole point of the metric.

Ignoring the loan's clock. The $14,790 payment is constant for 30 years, but its split between interest and principal is not: year one carries about $12,611 of interest and $2,180 of principal. The cash on cash return stays flat while the equity build grows, which is one reason investors track this metric alongside others rather than alone.