What a 2% Cash on Cash Return Looks Like

A 2% cash on cash return means the property pays you $2 a year for every $100 of cash you put into it. That is a weak cash yield. The property is barely paying you for the cash and the risk, and the investment case rests on appreciation, principal paydown and tax benefits rather than income.

A 2% return on a $500,000 rental

With 25% down and 3% closing costs, the cash invested is $140,000. A 2% return on that is $2,800 a year, or $233 a month, after every expense and the mortgage.

Rent needed: $4,495 a month (0.90% of price)
Collected after 5% vacancy: $51,243 a year
Operating expenses: $17,724 (35% of collected rent)
Net operating income: $33,519 (a 6.7% cap rate)
Debt service on the $375,000 loan: $30,698
Cash flow: $2,821 on $140,000 invested

The all-cash return on the same property at this rent would be 6.5%. Financing at 7.25% lowers the return because the loan costs more than the property yields, so the same rent produces a higher return with less leverage.

Rent needed for 2% at other purchase prices

Same assumptions, different prices. The last column is rent as a percent of price, the quick screen investors use.

Price	Cash invested	Cash flow for 2%	Rent needed	Rent / price
$100k	$28,000	$560	$900	0.90%
$150k	$42,000	$840	$1,350	0.90%
$200k	$56,000	$1,120	$1,795	0.90%
$250k	$70,000	$1,400	$2,245	0.90%
$300k	$84,000	$1,680	$2,695	0.90%
$350k	$98,000	$1,960	$3,145	0.90%
$400k	$112,000	$2,240	$3,595	0.90%
$450k	$126,000	$2,520	$4,045	0.90%
$500k	$140,000	$2,800	$4,495	0.90%
$600k	$168,000	$3,360	$5,390	0.90%
$700k	$196,000	$3,920	$6,290	0.90%
$800k	$224,000	$4,480	$7,190	0.90%

How the down payment changes the rent needed

More cash in means a smaller loan and lower debt service, but also a bigger denominator. At 7.25% the two effects work against each other, and less leverage needs less rent. On $500,000:

Down payment	Cash invested	Debt service	Rent for 2%
20%	$115,000	$32,744	$4,660
25%	$140,000	$30,698	$4,495
30%	$165,000	$28,651	$4,325
40%	$215,000	$24,558	$3,995
All cash	$515,000	$0	$2,010

Check your own deal against 2%

The calculator is loaded with the example above and a 2% target. Replace the numbers with yours.

Build both from the purchase, loan, rent and expenses

Cash on cash return

2.02%

Weak

Weak. Cash yield is below a savings account. The return depends on appreciation and paydown.

$2,821 cash flow / $140,000 invested

Annual numbers

Gross scheduled income: $53,940
Vacancy: -$2,697
Operating expenses35% of collected rent: -$17,724
Net operating income: $33,519
Debt service$2,558.16 a month: -$30,698
Annual cash flow: $2,821
Monthly cash flow: $235

Cash invested

Down payment: $125,000
Closing costs: $15,000
Upfront repairs: $0
Total cash invested: $140,000

Other metrics

Cap rateNOI / price: 6.70%
All-cash returnFinancing hurts your return: 6.51%
DSCR (NOI basis): 1.09
Payback on cash: 49.6 yrs

To hit 2.0%

Cash flow neededper year: $2,800
Rent neededper month, vs $4,495 now: $4,493
Max price at this rentvs $500,000 now: $500,318

2% cash on cash return questions

Is a 2% cash on cash return good?

Not on its own. A 2% cash yield is below what a savings account or Treasury pays. The deal only makes sense if appreciation, loan paydown or tax benefits carry the return.

How much rent do I need for a 2% cash on cash return?

On a $500,000 property with 25% down at 7.25% and the standard expense assumptions, about $4,495 a month. That produces $2,800 of annual cash flow on $140,000 invested. The rent needed scales with price and drops when you put more down.

What cash flow is a 2% return on $150,000 invested?

$3,000 a year, or about $250 a month. Multiply the cash you have in the deal by 0.02 to get the annual cash flow a 2% return requires.