How this cash on cash calculator works
Cash on cash return answers one question: for every dollar I put into this property, how many cents come back to me each year? It is the rental investor's equivalent of a dividend yield, and it is the number most people mean when they say a deal "cash flows."
The calculator builds the annual cash flow the way an underwriter would. Rent and other income, minus a vacancy allowance, gives collected income. Taxes, insurance, HOA, maintenance, capital reserves and management come off next, leaving net operating income. The mortgage payment comes off last. What is left is the cash flow, and dividing it by the cash you invested gives the return.
It also solves in reverse. Set a target return and it tells you the rent you would need at this price, and the most you could pay at this rent. Those two figures are what you take to a negotiation.
The cash on cash return formula
Cash on cash return = annual pre-tax cash flow / total cash invested
Using the default deal above: a $250,000 rental with a 25% down payment ($62,500), $7,500 in closing costs and $5,000 of repairs puts $75,000 of cash into the deal. Rent of $2,600 is $31,200 a year. After 5% vacancy and $9,535 of operating expenses, net operating income is $20,105.
The $187,500 loan at 7.25% costs $15,349 a year. Cash flow is $4,756, about $396 a month. Divide by $75,000 and the cash on cash return is 6.3%. To reach 8%, rent would need to be $2,733, or the price would need to fall to about $235,152.
The formula guide walks through each line with three more examples, including an all-cash purchase and a short-term rental.
What is a good cash on cash return?
A cash on cash return of 8 to 12% is good for a financed long-term rental. Above 12% is excellent. Between 4 and 8% is fair and common in markets where investors are also buying appreciation. Under 4% the property is barely paying you for the cash and the risk.
| Return | Rating | Where you tend to find it |
|---|---|---|
| 12%+ | Excellent | Low-cost Midwest and South markets, value-add deals, well-run short-term rentals |
| 8 to 12% | Good | Cash-flow markets at 20 to 25% down, small multifamily, house hacks |
| 4 to 8% | Fair | Mid-priced metros, turnkey rentals, most deals at 7%+ interest rates |
| 0 to 4% | Weak | High-priced coastal markets, condos with big HOA dues, over-leveraged purchases |
| Below 0% | Negative | Rent does not cover expenses and debt. You pay to own it. |
Every return level has its own page with worked numbers. Start with what an 8% cash on cash return looks like or read the full guide to what counts as a good return.
Cash on cash return vs cap rate
Cap rate is net operating income divided by price. It measures the property. Cash on cash is cash flow after the mortgage divided by cash invested. It measures your deal. Buy the same property all cash and the two are nearly identical. Add a loan and they split.
When the loan's annual cost (the full year of payments as a share of the loan, called the mortgage constant) is below the cap rate, financing lifts your cash on cash above the all-cash return. That is positive leverage. When the constant is above the cap rate, financing drags the return down, and more leverage makes it worse. At 7.25% over 30 years the constant is about 8.2%, so a property needs a cap rate above that before borrowing helps. The calculator shows the all-cash return next to the financed one so you can see which side of that line a deal sits on. More in cash on cash vs cap rate.
What cash on cash return leaves out
Three real parts of a rental's return are missing from the figure. Capital appreciation: a 3% rise on the default property is $7,500 of equity, more than the year's cash flow, and none of it counts. Principal paydown, about $1,800 in the first year, which moves your money from the loan balance into equity. And depreciation, the tax deduction that shelters much of the cash flow from income tax and depends on your bracket rather than the property.
It also has a trap on the other side. Money you receive that is return of capital, such as cash-out refinance proceeds, is borrowed or returned money, not income. Counting it as cash flow shows a spectacular year on a property that now carries a larger payment. Cash on cash measures income on your capital; anything that hands the capital back belongs in a different column.
How to raise a cash on cash return
Every lever changes either the cash flow on top or the cash invested on the bottom. The calculator shows the exact dollar effect of each.
- Pay less. The "max price at this rent" figure is the most you can pay and still hit your target. Offer accordingly.
- Raise rent to market. Every $100 a month of rent, after vacancy and percentage expenses, is roughly $900 a year of cash flow.
- Put less down, if the numbers allow. Less cash in raises the return only when the loan's annual cost is below the cap rate. Otherwise it lowers it.
- Cut the rate. Half a point on a $187,500 loan is about $750 a year in cash flow.
- Add income. Pet rent, storage, laundry, a garage lease. Small amounts with no added cash invested.
- Self-manage. Removing an 8% management fee on $2,600 of rent adds about $2,400 a year. Count your time honestly.
- Negotiate seller credits. Closing costs paid by the seller reduce cash invested directly.
The full guide ranks these by what they cost to pull.