How do I calculate cash-on-cash return?

Divide the annual pre-tax cash flow by the total cash you invested. Cash flow is rent minus vacancy, operating expenses and mortgage payments. Cash invested is the down payment, closing costs and any upfront repairs. A property producing $4,756 a year on $75,000 invested returns 6.3%.

Build the cash flow line by line. Start with annual rent, subtract a vacancy allowance of 5 to 8%, then subtract property taxes, insurance, HOA, maintenance, capital reserves and management. What remains is net operating income. Subtract twelve months of principal and interest to get cash flow.

Then total the cash you paid out of pocket: down payment, buyer closing costs, loan points, and repairs or furnishing before the first tenant. Divide cash flow by that figure and multiply by 100. Use gross rent with no vacancy, or skip management and reserves, and the number will be two to four points too high.