Levered vs Unlevered Cash on Cash Return: Both Formulas, Worked

Levered vs unlevered cash on cash return are the same ratio with two different pairs of inputs. The unlevered version puts the property’s full net operating income over the full cash it takes to buy outright. The levered version puts what is left after the mortgage payment over the cash you actually wrote checks for.

Deal memos quote both figures and label neither. Here are both formulas, then the same $500,000 rental run through each.

The two formulas, written out

Figure	Top of the fraction	Bottom of the fraction
Unlevered cash on cash return	Annual net operating income, no loan payment subtracted	Price + closing costs + rehab
Levered cash on cash return	Net operating income minus a year of debt service	Down payment + closing costs + rehab

Borrowing shrinks the top and the bottom at the same time. The top drops by a year of payments. The bottom drops by the loan amount. Which one shrinks faster decides which figure is higher, and nothing else does.

The unlevered version: all cash, no lender

To calculate unlevered cash on cash return you need two numbers, and neither is the interest rate.

Start with the property’s annual net operating income. The $500,000 rental collects $5,200 a month, or $62,400 a year. Take out property taxes of $6,000, insurance of $2,400, and the calculator’s allowances for vacancy, management and maintenance, and $40,210 is left.

Then total the cash it takes to own it free and clear. That is the $500,000 price, plus the fees you pay at the table, plus the $10,000 of rehab. Closing costs run roughly 2% to 5% of price depending on the state and the lender; this example uses $15,000. Total cash in: $525,000.

$40,210 divided by $525,000 is 7.7%.

That is the unlevered figure. It sits a little under the 8.0% cap rate, because closing costs and rehab are in the denominator while the cap rate uses price alone.

The levered version: after debt service

Now add a loan. Put 25% down at 7.25% over 30 years.

A year of payments on the $375,000 loan comes to about $30,750. Subtract it from net operating income and $9,460 of cash flow is left.

Your cash in is now the 25% you brought of $125,000, plus the same $15,000 of closing costs, plus the same $10,000 of rehab. Total: $150,000.

$9,460 divided by $150,000 is 6.3%.

One thing trips people here. Subtract the whole payment, principal included. Principal is not a deductible expense, so it never shows up on a tax return, but it does leave your bank account every month. If you want to see how that split moves over the years, an amortization schedule lays it out payment by payment.

Running the same property through both

Same rent, same taxes, same insurance, same rehab. Only the loan changes.

Scenario	Unlevered	Levered
25% down at 7.25%	7.7%	6.3%
20% down at 7.25%	7.7%	6.0%
25% down at 5%	7.7%	10.7%
20% down at 5%	7.7%	11.5%

The unlevered column never moves. It cannot. No loan term appears in that formula, which is exactly what makes it useful for comparing one property against another.

Reading the spread between them

Subtract the unlevered figure from the levered one. That spread is the only thing financing did to your cash yield.

At 7.25% the spread is about 1.4 points of drag. At 5% it is about 3 points of lift. The flip point is the mortgage constant, a year of payments divided by the loan balance, measured against the cap rate. The guide on borrowing and cash on cash works through where that line falls at different rates.

A quick read with no math: if the levered figure is below the unlevered one, borrowing is costing you current cash yield on this deal.

When the levered figure comes out lower

Three things push it under the unlevered figure.

The rate. At a mortgage constant above the cap rate, borrowed dollars cost more per year than they earn.

The term. A 20-year amortization raises the annual payment even at the same rate, so more of the rent goes to principal and less shows up as cash flow.

The loan size. When the spread is negative, borrowing more makes it worse. That is why 20% down pays 6.0% while 25% down pays 6.3%.

Watch the cushion too. At $40,210 of net operating income against $30,750 of payments, the debt service coverage ratio is about 1.31. Thinner than that and one bad vacancy comes out of your pocket.

A lower levered figure is not a reason to pass. It is a lower cash yield in exchange for keeping $375,000 free for other deals, plus principal paydown and appreciation on a larger asset.

Which figure belongs in which conversation

Comparing two properties, or checking a property against cap rate: unlevered. It holds no financing assumptions, so the properties are the only variable.

Deciding how much to put down, or asking what your own money earns: levered. That is the number your bank account will recognize.

Talking to a lender: they will care about coverage and loan size more than either ratio.

Reading someone else’s memo: if the write-up says 8% and nothing else, find out what went on top. The Simple tab shows $12,000 of annual cash flow on $150,000 invested, which is 8%. That 8% is levered if the $12,000 is after the mortgage payment and unlevered if it is not. Same arithmetic, two different claims.

Run both on your own numbers

The Cash on Cash Return Calculator on the home page shows the financed return and the all cash return side by side, so you get the levered and unlevered figures from one set of inputs. Change the rate or the down payment and watch the spread between them move.