Cash on Cash Return Formula: How to Calculate It Step by Step

The cash on cash return formula is:

Cash on cash return = annual pre-tax cash flow / total cash invested

The formula is simple. The work is in building the two numbers honestly. Here is each input, in the order an underwriter would compute them, followed by three worked examples.

Step 1: gross scheduled income

Monthly rent times twelve, plus any other income the property produces: parking, laundry, storage, pet rent, utility reimbursements. This is what the property would collect if every unit were full every day.

Step 2: vacancy and credit loss

Subtract an allowance for empty months and unpaid rent. Long-term rentals in stable markets run 5%. Student housing, lower-priced units and high-turnover markets run 8 to 10%. What is left is effective gross income, the money you will actually collect.

Step 3: operating expenses

Everything it costs to run the property except the mortgage:

• Property taxes. Use the bill you will pay after purchase, not the seller’s. Many counties reassess at sale.
• Insurance. Landlord policy, plus flood or wind if required.
• HOA or condo dues.
• Maintenance and repairs. A common allowance is 5 to 10% of collected rent, higher on older properties.
• Capital reserves. Roof, HVAC, water heater, appliances. Another 5 to 10% of collected rent set aside so the year the roof fails does not wipe out three years of cash flow.
• Property management. 8 to 10% of collected rent for long-term rentals, 15 to 30% for short-term. Include it even if you self-manage, or know the number without it and label it that way.
• Owner-paid utilities, landscaping, snow removal, pest control.

Effective gross income minus operating expenses is net operating income, or NOI. Cap rate is NOI divided by price, and it is worth noting here because it will matter in the examples.

Step 4: debt service

Twelve months of principal and interest on the loan. Use the amortizing payment unless the loan is interest-only, in which case use the interest-only payment and remember it will rise later.

NOI minus debt service is annual pre-tax cash flow.

Step 5: total cash invested

Down payment, plus closing costs, plus loan points and fees, plus inspection and appraisal, plus repairs or furnishing before the first tenant. If you bought below market and pulled cash out at closing through a refinance, subtract what came back.

Step 6: divide

Cash flow divided by cash invested, times 100 for a percentage. The calculator runs all six steps and shows every intermediate line.

Example 1: a financed long-term rental

$250,000 house, 25% down, 3% closing costs, $5,000 of make-ready. Rent $2,600. Taxes $3,000, insurance $1,200, 5% vacancy, 5% maintenance, 5% capital reserves, 8% management. Loan of $187,500 at 7.25% over 30 years.

Line	Amount
Gross scheduled income	$31,200
Vacancy at 5%	($1,560)
Effective gross income	$29,640
Taxes and insurance	($4,200)
Maintenance, reserves, management at 18%	($5,335)
Net operating income	$20,105
Debt service ($1,279 a month)	($15,349)
Annual cash flow	$4,756
Cash invested ($62,500 + $7,500 + $5,000)	$75,000
Cash on cash return	6.3%

Cap rate is $20,105 / $250,000, or 8.0%.

Example 2: the same property, all cash

No loan. Cash invested is the full price plus closing and repairs: $262,500.

Cash flow is the NOI, $20,105, since there is no debt service. Cash on cash return is $20,105 / $262,500, or 7.7%.

The all-cash return is higher than the financed one. The loan at 7.25% costs $15,349 a year on $187,500, which is 8.2% of the balance once principal is included. The property only yields 8.0%. Borrowing at 8.2% to earn 8.0% loses a little on every dollar borrowed. This is negative leverage, and the leverage guide covers it in depth.

Example 3: a short-term rental

$400,000 house near a lake. 25% down, 3% closing, $25,000 of furnishing and setup. Cash invested: $137,000.

Gross bookings average $5,500 a month, $66,000 a year. Seasonal vacancy and platform fees take 30%, leaving $46,200 collected. Taxes are $4,800, insurance $2,400, and cleaning, supplies, utilities, higher maintenance and co-hosting run 25% of collected income, or $11,550. Operating expenses total $18,750 and NOI is $27,450.

The $300,000 loan at 7.5% costs $2,098 a month, $25,172 a year. Cash flow is $2,278. Cash on cash return is 1.7%.

The gross income is more than double the long-term rental in example 1. The return is a quarter of it. Furnishing added $25,000 to the denominator, and short-term operating costs consumed most of the extra revenue. Short-term rentals can produce excellent cash on cash returns, but only when the occupancy and expense assumptions are built from real data, not from the listing’s peak-season rate.

Mistakes that inflate the number

• Using gross rent with no vacancy.
• Skipping capital reserves because nothing is broken today.
• Leaving out management because you plan to self-manage, without labeling the result.
• Using the seller’s tax bill on a property that will be reassessed.
• Counting only the down payment as cash invested and forgetting closing costs and repairs.
• Using the interest-only payment without noting when it ends.

Each of these can add one to three points to the return. Together they can turn a 4% deal into a 10% deal on paper.

What to do with the result

Compare it against your hurdle rate, and against the cap rate and all-cash return to see whether the financing is helping. The good cash on cash return guide covers what the number should be. The return pages show what each percentage looks like in rent and cash flow.