What a 4% Cash on Cash Return Looks Like

A 4% cash on cash return means the property pays you $4 a year for every $100 of cash you put into it. That is a fair return. It is common in mid-priced markets and at today's interest rates, and many investors accept it when they expect rent growth or appreciation. On cash yield alone it is roughly what a bond pays with less work.

A 4% return on a $250,000 rental

With 25% down and 3% closing costs, the cash invested is $70,000. A 4% return on that is $2,800 a year, or $233 a month, after every expense and the mortgage.

Rent needed: $2,395 a month (0.96% of price)
Collected after 5% vacancy: $27,303 a year
Operating expenses: $9,165 (34% of collected rent)
Net operating income: $18,138 (a 7.3% cap rate)
Debt service on the $187,500 loan: $15,349
Cash flow: $2,789 on $70,000 invested

The all-cash return on the same property at this rent would be 7.0%. 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 4% 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 4%	Rent needed	Rent / price
$100k	$28,000	$1,120	$960	0.96%
$150k	$42,000	$1,680	$1,440	0.96%
$200k	$56,000	$2,240	$1,915	0.96%
$250k	$70,000	$2,800	$2,395	0.96%
$300k	$84,000	$3,360	$2,875	0.96%
$350k	$98,000	$3,920	$3,355	0.96%
$400k	$112,000	$4,480	$3,835	0.96%
$450k	$126,000	$5,040	$4,315	0.96%
$500k	$140,000	$5,600	$4,790	0.96%
$600k	$168,000	$6,720	$5,750	0.96%
$700k	$196,000	$7,840	$6,710	0.96%
$800k	$224,000	$8,960	$7,670	0.96%

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 $250,000:

Down payment	Cash invested	Debt service	Rent for 4%
20%	$57,500	$16,372	$2,450
25%	$70,000	$15,349	$2,395
30%	$82,500	$14,326	$2,340
40%	$107,500	$12,279	$2,230
All cash	$257,500	$0	$1,555

Check your own deal against 4%

The calculator is loaded with the example above and a 4% target. Replace the numbers with yours.

Cash on cash return

3.98%

Weak

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

$2,789 cash flow / $70,000 invested

Annual numbers

Gross scheduled income: $28,740
Vacancy: -$1,437
Operating expenses34% of collected rent: -$9,165
Net operating income: $18,138
Debt service$1,279.08 a month: -$15,349
Annual cash flow: $2,789
Monthly cash flow: $232

Cash invested

Down payment: $62,500
Closing costs: $7,500
Upfront repairs: $0
Total cash invested: $70,000

Other metrics

Cap rateNOI / price: 7.26%
All-cash returnFinancing hurts your return: 7.04%
DSCR (NOI basis): 1.18
Payback on cash: 25.1 yrs

To hit 4.0%

Cash flow neededper year: $2,800
Rent neededper month, vs $2,395 now: $2,396
Max price at this rentvs $250,000 now: $249,855

4% cash on cash return questions

Is a 4% cash on cash return good?

It is acceptable, not strong. A 4% return is common in mid-priced markets at current rates. Investors who take it usually expect rent growth or appreciation to lift the total return.

How much rent do I need for a 4% cash on cash return?

On a $250,000 property with 25% down at 7.25% and the standard expense assumptions, about $2,395 a month. That produces $2,800 of annual cash flow on $70,000 invested. The rent needed scales with price and drops when you put more down.

What cash flow is a 4% return on $75,000 invested?

$3,000 a year, or about $250 a month. Multiply the cash you have in the deal by 0.04 to get the annual cash flow a 4% return requires.