How to Calculate Cash-on-Cash Return on a Rental Property
The formula: annual cash flow ÷ cash invested
Cash-on-cash return answers one question: for the cash you actually put into a rental, what did it pay you this year? The formula is annual pre-tax cash flow ÷ total cash invested. Cash flow is what is left after every operating expense and the mortgage payment. Cash invested is the down payment plus closing costs plus the money spent to make the place rentable, not the purchase price. It is a before-tax, this-year number, and it is the one a landlord feels in the checking account. The cash-on-cash calculator runs the whole chain from rent to return.
Cash-on-cash vs cap rate vs total return
The three get mixed up because they share inputs. Cap rate is net operating income ÷ purchase price. It ignores financing entirely, which makes it good for comparing two buildings and useless for telling you what your money earns once a loan is involved. Cash-on-cash puts the loan back in and measures the return on your own cash, so the same building shows a different cash-on-cash at 20% down than at 40% down. Total return adds the things cash-on-cash ignores: appreciation, the principal your tenants pay down each year, and the tax effect of depreciation. A property with a 2% cash-on-cash can still be a sound investment on total return, and one showing 10% can be a bad one if the roof is about to go. Know which number you are looking at.
Building the numbers from gross rent to cash flow
- Gross scheduled rent. Monthly rent × 12, at the rent the unit will actually get, not the listing you hope for.
- Vacancy and credit loss. Subtract 5% to 8% in most markets, more for short leases or a rough block. Even a tenant who never leaves turns over eventually.
- Operating expenses. Property taxes, insurance, repairs and maintenance, a capital reserve for the roof, furnace and water heater (not optional just because they are not due this year), management (8% to 10% of collected rent if you hire it out, and worth pricing in even if you self-manage), and any utilities, lawn, snow or trash you pay. The mortgage is not an operating expense.
- Net operating income (NOI). Effective rent minus operating expenses.
- Debt service. Principal and interest for the year. The mortgage payment calculator gives the monthly figure.
- Cash flow. NOI minus debt service. Divide by cash invested and you have your cash-on-cash return.
Worked example: a $200,000 single-family rental
Purchase price $200,000 with 25% down ($50,000), $6,000 in closing costs and $4,000 of paint, flooring and repairs before the first tenant: $60,000 cash invested. Rent is $1,900 a month. Expenses for the year: taxes $2,500, insurance $1,300, maintenance $1,300, capital reserve $1,200, management at roughly 8% ($1,700) and lawn and snow $200, for $8,200. The $150,000 loan at 7% for 30 years costs about $998 a month.
| Line | Annual |
|---|---|
| Gross rent ($1,900 × 12) | $22,800 |
| Vacancy 5% | −$1,140 |
| Effective rent | $21,660 |
| Operating expenses | −$8,200 |
| Net operating income | $13,460 |
| Debt service ($998 × 12) | −$11,976 |
| Cash flow | $1,484 |
| Cash-on-cash ($1,484 ÷ $60,000) | 2.5% |
| Cap rate ($13,460 ÷ $200,000) | 6.7% |
Notice the gap between the 6.7% cap rate and the 2.5% cash-on-cash. At 7% interest the loan eats most of the operating income; the same deal at 5% would cash-flow about $2,300 a year better. The owner is still picking up roughly $1,500 of principal paydown in the first year and whatever the house appreciates, but that is total return, not cash in hand. One changed assumption moves the answer a lot, so run the numbers with your own tax bill and insurance quote, not averages.
What "good" looks like, the 1% rule and DSCR
There is no universal target. A 4% cash-on-cash on a newer house in a stable suburb and an 11% return on a 1920s duplex in a rough block are not the same risk, and neither is better on its face. Compare the return with what the same cash earns elsewhere, with how much work the property is, and with how much of the return depends on nothing going wrong. Leverage cuts both ways: a bigger loan raises cash-on-cash when the rate is low and sinks it when the rate is not.
Two quick screens are worth knowing. The 1% rule says monthly rent should be at least 1% of the all-in price (purchase plus rehab) for a deal to deserve a closer look; the example above is $1,900 on $204,000, about 0.93%, which is why its cash flow is thin. It is a screen, not a verdict. DSCR, the debt service coverage ratio, is what a lender checks: NOI ÷ annual debt service, and many investment-property lenders want 1.2 or 1.25 or better. The example is $13,460 ÷ $11,976 = 1.12, which may mean a bigger down payment or a lower price to get the loan. If the real question is whether to buy a home at all, the rent vs. buy calculator runs the same kind of comparison.
Keep the books per unit
Cash-on-cash is only as honest as the numbers behind it, and the only way to know your real return is to track each unit's rent, each expense by category, and security deposits separately from income, all year. At year end that gives you actual cash flow to compare with the projection, and the same categories feed Schedule E. Depreciation, passive-loss limits and how a sale is taxed change the after-tax picture considerably; those are questions for a tax professional. Ledgerlord keeps the rent, expenses and year-end totals per unit offline, so the return you quote is the one you actually earned.
Step by step
- Add up the cash investedDown payment, closing costs and the rehab needed to make the unit rentable.
- Estimate effective rentMarket rent times 12, minus 5% to 8% for vacancy and credit loss.
- List the operating expensesTaxes, insurance, maintenance, a capital reserve, management and any utilities you pay. Not the mortgage.
- Compute net operating incomeEffective rent minus operating expenses. NOI divided by price is the cap rate.
- Subtract debt serviceTwelve months of principal and interest. What is left is annual pre-tax cash flow.
- Divide cash flow by cash investedThat is the cash-on-cash return. Check DSCR (NOI ÷ debt service) too, since lenders will.
Frequently asked questions
Is cash-on-cash return before or after taxes?
Before. It uses pre-tax cash flow and ignores depreciation, which often shelters some of that cash flow from income tax. The after-tax result depends on your own return; ask a tax professional.
Should I include a capital reserve in the expenses?
Yes. The roof, furnace and water heater wear out whether or not you set money aside. Leaving the reserve out makes cash-on-cash look better than it is.
What is a good cash-on-cash return?
There is no single target. It depends on the market, the condition of the property, your leverage and interest rate, and what the same cash could earn elsewhere. Compare deals on the same basis and be honest about risk.
How is cash-on-cash different from cap rate?
Cap rate is NOI divided by the purchase price and ignores the loan; cash-on-cash is cash flow after the loan payment divided by the cash you put in. They answer different questions.
Written by TapForge Studios, a one-person Android studio run by a tradesman with a background in electrical, HVAC and life-safety work. Reviewed October 7, 2026. This guide is general information, not engineering, legal or tax advice; the adopted code edition, the manufacturer's instructions and the authority having jurisdiction govern.
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