How to Calculate Cash-on-Cash Return on a Rental Property (With a Worked Example)
The formula, a step-by-step example with made-up numbers, and the honest expense assumptions that keep a "great deal" from turning into a money pit.
Cash-on-cash return answers one practical question: for every dollar I actually put into this deal, how many cents come back to me each year in cash?
It's one of the most useful numbers for small landlords because it reflects how you really buy: with a loan, a down payment, closing costs, and maybe some rehab. It's also easy to fudge without meaning to. This guide covers the formula, a full example, and the mistakes to avoid.
Not financial, tax, or legal advice. The numbers below are a made-up illustration, not market data or a recommendation. Run your own numbers and talk to a qualified professional before buying.
The formula
Cash-on-cash return = Annual pre-tax cash flow ÷ Total cash invested
- Annual pre-tax cash flow = rent collected − operating expenses − debt service (your full mortgage payment, principal and interest).
- Total cash invested = down payment + closing costs + upfront repairs/rehab + any other cash you put in before the property produced income.
Express it as a percentage. If you invested $50,000 and the property throws off $4,000 a year in cash, your cash-on-cash return is 8%.
Cash-on-cash vs. cap rate vs. ROI
These get mixed up constantly:
- Cap rate = Net operating income (NOI) ÷ purchase price. It ignores financing and compares properties as if you paid cash.
- Cash-on-cash includes financing. It measures the return on your cash.
- Total ROI usually adds in principal paydown, appreciation, and sometimes tax effects. It's useful, but it relies on more assumptions.
Use cap rate to compare properties, and cash-on-cash to judge whether this deal, financed this way is worth your money.
For a deeper walkthrough, read how to calculate cap rate, or skip the math with the free cap rate calculator and the free cash-on-cash return calculator.
A worked example (hypothetical numbers)
Say you're looking at a duplex. All figures are invented for illustration.
Purchase and cash in
| Item | Amount |
|---|---|
| Purchase price | $250,000 |
| Down payment (25%) | $62,500 |
| Closing costs | $6,000 |
| Upfront repairs | $5,000 |
| Total cash invested | $73,500 |
Income
| Item | Monthly | Annual |
|---|---|---|
| Gross rent (2 units × $1,300) | $2,600 | $31,200 |
| Less vacancy allowance (5%) | −$130 | −$1,560 |
| Effective gross income | $2,470 | $29,640 |
Operating expenses (annual)
| Item | Annual |
|---|---|
| Property taxes | $3,600 |
| Insurance | $1,500 |
| Repairs & maintenance reserve (8% of gross rent) | $2,496 |
| Capital expenditure reserve (5% of gross rent) | $1,560 |
| Water/sewer/trash (landlord-paid) | $1,200 |
| Management (self-managed, but budgeting 0 here) | $0 |
| Other (advertising, legal, misc.) | $500 |
| Total operating expenses | $10,856 |
Net operating income (NOI) = $29,640 − $10,856 = $18,784
Debt service
Loan of $187,500 at a hypothetical 7% for 30 years. The principal-and-interest payment is about $1,247/month, or $14,964/year.
Annual pre-tax cash flow = $18,784 − $14,964 = $3,820
Cash-on-cash return = $3,820 ÷ $73,500 = 5.2%
For comparison, the cap rate is $18,784 ÷ $250,000 = 7.5%.
Notice what happened: a deal with a reasonable-looking cap rate produced a much more modest cash-on-cash return because of the financing cost. That's exactly what cash-on-cash is supposed to reveal.
The five mistakes that inflate cash-on-cash
1. Leaving out vacancy
No property is rented 365 days a year forever. Budget for turnover time. A few percent of gross rent is a common placeholder, but use your local reality.
2. Forgetting repairs and capital expenditures
"It's newly renovated" doesn't mean $0 repairs. Roofs, water heaters, and HVAC systems eventually need replacing. Set aside a reserve every month even if you don't spend it, and count it as an expense in your analysis.
3. Valuing your own time at zero
If you self-manage, you're doing a job. Many investors budget a management fee anyway, so the deal still works if they hire a manager later.
4. Leaving cash out of the denominator
Closing costs, lender fees, inspection, appraisal, and that first month of rehab are all cash you invested. Leaving them out shrinks the denominator and flatters the return.
5. Using the seller's numbers
A seller's "pro forma" is a sales document. Verify rents against comparable listings, get actual tax bills, and get an insurance quote of your own.
What's a "good" cash-on-cash return?
There's no universal answer. It depends on your market, your financing, your alternatives, and how much work and risk you're taking on. Some investors set a personal minimum and walk away from anything below it. Others accept lower cash flow in exchange for expected appreciation or principal paydown. Decide your own threshold before you fall in love with a property.
A useful habit: also check the debt service coverage ratio (NOI ÷ annual debt service). In the example, that's $18,784 ÷ $14,964 ≈ 1.26. It tells you how much cushion you have before the property can't cover its mortgage. Lenders on investment loans often look at this number too.
Stress-test before you commit
Change one assumption at a time and watch the return:
- Rent 10% lower
- Interest rate 1 point higher
- Vacancy doubled
- A $6,000 surprise repair in year one
If the deal only works when everything goes right, it's not a good deal.
Run it in a spreadsheet, not on a napkin
You can do all of this by hand, but a spreadsheet lets you stress-test in seconds. The Rental Deal Analyzer in the Toolkit calculates cash flow, cap rate, cash-on-cash, DSCR, and a five-year projection from the inputs above, and it scores the deal against thresholds you set.
Once you own the property, track actual results against your projections with the bookkeeping system in our expense tracking spreadsheet guide.
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This article is for general educational purposes and is not financial, tax, or legal advice. Example figures are hypothetical. — Jon, Everyone's Landlord
Tools that help with this
- Free cap rate calculator
- Free cash-on-cash return calculator
- Rental Deal Analyzer ($19)
- BRRRR & Flip Analyzer ($24)
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