What Is Cash on Cash Return? The Rental Investor's Yield, Explained

Cash on cash return is the annual pre-tax cash flow a rental property produces, divided by the total cash you put in to buy it. A property that pays you $4,756 a year on $75,000 invested has a cash on cash return of 6.3%.

It is the closest thing real estate has to a dividend yield. It ignores what the property is worth and what the loan is doing. It asks only how much cash comes back each year for each dollar of cash that went in.

The formula

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

Cash flow is rent and other income, minus vacancy, minus operating expenses, minus the mortgage payment. Cash invested is the down payment, closing costs and any repairs or furnishing before the first tenant. The formula guide works through every line with examples.

A worked example

A $250,000 single-family rental. You put 25% down ($62,500), pay $7,500 in closing costs and spend $5,000 on paint and carpet. Cash invested is $75,000.

It rents for $2,600 a month, or $31,200 a year. Allow 5% for vacancy and you collect $29,640. Property taxes are $3,000, insurance $1,200, and you set aside 18% of collected rent for maintenance, capital reserves and management, about $5,335. Operating expenses total $9,535 and net operating income is $20,105.

The $187,500 loan at 7.25% over 30 years costs $1,279 a month, or $15,349 a year. Cash flow is $20,105 minus $15,349, which is $4,756 a year or about $396 a month.

$4,756 divided by $75,000 is a cash on cash return of 6.3%.

What it leaves out

Cash on cash return is deliberately narrow. Three real sources of return are missing from it.

Principal paydown. In the first year of the loan above, about $1,815 of the payments goes to principal. That is equity you own, but it is not cash in your pocket, so it is excluded.

Appreciation. If the property gains 3% in value, that is $7,500 of equity. Also excluded.

Tax benefits. Depreciation on a residential rental is spread over 27.5 years under IRS rules, which shelters part of the cash flow from income tax. Excluded as well.

Add those three back and the first-year total return on the same deal is roughly 18.8%. That gap is why a 6% cash on cash return can still be a good investment, and why cash on cash alone is not enough to judge one.

Why investors use it anyway

Because cash is what pays the bills. Appreciation is a forecast. Principal paydown is locked in the property until you sell or refinance. Tax benefits depend on your bracket and how the IRS treats your income. Cash flow arrives every month and either covers the mortgage or does not.

Cash on cash return also makes deals comparable. A $150,000 duplex and a $600,000 fourplex have nothing in common on price, but if one returns 9% on cash and the other returns 5%, you know which one is working harder for your money.

And it is what lenders and partners ask about. A private lender or equity partner wants to know the cash yield before they care about anything else. Mortgage lenders on rental property ask a narrower version, whether rent covers the payment, which is what the DSCR loan calculator measures.

What it is not good at

Cash on cash return is a snapshot of one year. It does not know that rents will rise, that the roof is 20 years old, or that the interest-only period ends in year five. It treats a property in a growing market and a property in a shrinking one identically if the first-year numbers match.

It is also sensitive to how you count. Leaving management out because you self-manage, using 0% vacancy, or forgetting capital reserves can double the number. The good cash on cash return guide covers the assumptions that make the figure honest.

For decisions that span years, or that hinge on appreciation and a sale, use it alongside IRR or total return. The cash on cash vs ROI guide explains when each one answers the question you are asking.

When to use it

Screening. Run it on every deal before you go deeper. A property that cannot reach your minimum cash yield on honest assumptions is usually not worth a second look, whatever the appreciation story.

Comparing financing. The same property at 20% down, 25% down and all cash produces three different cash on cash returns. The leverage guide explains why, and why more leverage does not always mean more return.

Setting a price. Fix the return you want, and the calculator tells you the most you can pay at a given rent. That is a number you can negotiate with.