Cash-on-Cash Return Calculator

Worked example

You buy a $250,000 single-family rental with 25% down. The down payment is $62,500 and the loan is $187,500 at 7% for 30 years, a payment of $1,247 a month or $14,969 a year. Closing costs are $7,500 and you spend $5,000 on repairs before the first tenant moves in, so your total cash invested is $75,000.

Rent is $2,400 a month, or $28,800 a year. At 95% occupancy, effective gross income is $27,360. Operating expenses at 35% of EGI are $9,576, so net operating income is $17,784.

Annual cash flow is $17,784 - $14,969 = $2,815. Cash-on-cash return is $2,815 / $75,000 = 3.75%. The cap rate on the same deal is 7.11%, so in this example the 7% loan is pulling your cash return down, not pushing it up.

What cash-on-cash return measures

Cash-on-cash return is the annual pre-tax cash flow from a property divided by the total cash you put into it. It answers the question most investors actually care about: for every dollar I took out of my bank account, how many cents come back each year?

Unlike cap rate, it includes your financing. Two investors buying the same building can have very different cash-on-cash returns depending on how much they put down and what interest rate they get. That makes it the right number to compare a rental against other places you could put the same money.

The formula

Cash-on-cash return = annual cash flow / total cash invested.

• Annual cash flow is net operating income minus annual debt service (twelve mortgage payments, principal and interest).
• Net operating income is effective gross income minus operating expenses. Effective gross income is gross rent times occupancy.
• Total cash invested is everything you paid out of pocket to own the property and get it rented: the down payment, closing costs, loan fees and up-front repairs.

Leave out anything the bank paid for. If you finance the closing costs into the loan, they are not part of cash invested, but they do raise the loan balance and the payment.

Why leverage can raise or lower the return

Borrowing helps when the property earns more than the loan costs. Compare the cap rate, which is the property's unlevered yield, to the loan constant, which is annual debt service divided by the loan amount. On a 30-year loan at 7%, the loan constant is about 8%. If the cap rate is above the loan constant, every borrowed dollar adds to your return. If it is below, as in the example, every borrowed dollar subtracts from it.

That is why cash-on-cash returns on new purchases have been thin when mortgage rates are high. A bigger down payment can actually raise the cash-on-cash return in that situation, because you are borrowing less of the expensive money. Try it: change the down payment above and watch the result.

What is a good cash-on-cash return?

Many investors look for 8% to 12% on a stabilized rental, but the right target depends on what else you could do with the cash and how much risk and work the property involves. A return below what you could earn in a high-yield savings account or a bond fund needs a strong reason, such as expected rent growth or a plan to add value.

Remember what cash-on-cash leaves out. It ignores principal paydown, appreciation and tax benefits like depreciation, which can add several points to your total return. It also only looks at year one. A deal with a modest first-year return and below-market rents can look very different in year three.

Checking the inputs

The two inputs people get wrong most often are occupancy and expenses. Use the occupancy the local market really supports, and use an expense ratio that includes management, repairs, a capital reserve, taxes at your purchase price and insurance. For a quick lender view of the same deal, run the NOI and loan through the DSCR calculator. To see the property's return without financing, use the cap rate calculator.

More calculators

Results are estimates for education only, not financial, tax or legal advice. Check numbers with your lender and advisors before you buy.