What a 3% Cash on Cash Return Looks Like

A 3% cash on cash return means the property pays you $3 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 3% return on a $500,000 rental

With 25% down and 3% closing costs, the cash invested is $140,000. A 3% return on that is $4,200 a year, or $350 a month, after every expense and the mortgage.

Rent needed: $4,640 a month (0.93% of price)
Collected after 5% vacancy: $52,896 a year
Operating expenses: $18,021 (34% of collected rent)
Net operating income: $34,875 (a 7.0% cap rate)
Debt service on the $375,000 loan: $30,698
Cash flow: $4,177 on $140,000 invested

The all-cash return on the same property at this rent would be 6.8%. 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 3% 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 3%	Rent needed	Rent / price
$100k	$28,000	$840	$930	0.93%
$150k	$42,000	$1,260	$1,395	0.93%
$200k	$56,000	$1,680	$1,855	0.93%
$250k	$70,000	$2,100	$2,320	0.93%
$300k	$84,000	$2,520	$2,785	0.93%
$350k	$98,000	$2,940	$3,250	0.93%
$400k	$112,000	$3,360	$3,715	0.93%
$450k	$126,000	$3,780	$4,180	0.93%
$500k	$140,000	$4,200	$4,640	0.93%
$600k	$168,000	$5,040	$5,570	0.93%
$700k	$196,000	$5,880	$6,500	0.93%
$800k	$224,000	$6,720	$7,430	0.93%

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 3%
20%	$115,000	$32,744	$4,780
25%	$140,000	$30,698	$4,640
30%	$165,000	$28,651	$4,505
40%	$215,000	$24,558	$4,225
All cash	$515,000	$0	$2,560

Check your own deal against 3%

The calculator is loaded with the example above and a 3% target. Replace the numbers with yours.

Build both from the purchase, loan, rent and expenses

Cash on cash return

2.98%

Weak

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

$4,177 cash flow / $140,000 invested

Annual numbers

Gross scheduled income: $55,680
Vacancy: -$2,784
Operating expenses34% of collected rent: -$18,021
Net operating income: $34,875
Debt service$2,558.16 a month: -$30,698
Annual cash flow: $4,177
Monthly cash flow: $348

Cash invested

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

Other metrics

Cap rateNOI / price: 6.97%
All-cash returnFinancing hurts your return: 6.77%
DSCR (NOI basis): 1.14
Payback on cash: 33.5 yrs

To hit 3.0%

Cash flow neededper year: $4,200
Rent neededper month, vs $4,640 now: $4,642
Max price at this rentvs $500,000 now: $499,667

3% cash on cash return questions

Is a 3% cash on cash return good?

Not on its own. A 3% 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 3% cash on cash return?

On a $500,000 property with 25% down at 7.25% and the standard expense assumptions, about $4,640 a month. That produces $4,200 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 3% return on $150,000 invested?

$4,500 a year, or about $375 a month. Multiply the cash you have in the deal by 0.03 to get the annual cash flow a 3% return requires.