Formula
Annual cash flow = (Rent × (1 − Vacancy) − Operating expenses − Mortgage payment) × 12
Cash-on-cash return = Annual cash flow ÷ (Down payment + Closing costs + Repairs)
Cash-on-cash return = Annual cash flow ÷ (Down payment + Closing costs + Repairs)
Example: You buy a $300,000 rental with $60,000 down, $9,000 of closing costs and $6,000 of repairs — $75,000 of cash. The $240,000 loan at 7% for 30 years costs $1,596.73 a month. With $2,500 rent and $700 of expenses, cash flow is $203.27 a month or $2,439 a year, a cash-on-cash return of about 3.25%.
Improving cash-on-cash return
- Negotiate the price or ask the seller to pay closing costs.
- Shop mortgage rates — 0.5% less on this loan adds about $80 a month.
- Budget realistic vacancy and repairs so the number holds up.
Compare with the unleveraged cap rate or model the loan in the mortgage calculator.
Frequently asked questions
What is cash-on-cash return?
It is the annual pre-tax cash flow divided by the total cash you put in (down payment, closing costs and upfront repairs). It measures the yield on your cash, including the effect of the mortgage.
What is a good cash-on-cash return?
Many investors look for 8–12%, but it depends on your goals. In expensive markets investors often accept lower cash flow in exchange for expected appreciation.
How is it different from ROI and cap rate?
Cap rate ignores financing. Total ROI adds appreciation, loan paydown and tax effects. Cash-on-cash looks only at the cash that lands in your account each year.
Why is my return negative?
If the mortgage payment plus expenses are higher than the rent, the property has negative cash flow. A bigger down payment, lower price or higher rent can fix it.