Real Estate Glossary
What is Cash-on-Cash Return? Definition, Formula & Examples
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Definition
Cash-on-cash return is the ratio of a property's annual pre-tax cash flow to the total cash you invested, expressed as a percentage. Unlike cap rate, it accounts for your specific financing terms, giving you the actual return on the money you physically put into the deal. It is one of the most practical metrics for leveraged real estate investors.
The Cash-on-Cash Return Formula
Variables explained:
Annual Pre-Tax Cash Flow is NOI minus annual mortgage payments (principal + interest). Total Cash Invested is your down payment plus closing costs plus any upfront repairs — all the money you spent before receiving a dollar of rent.
Cash-on-Cash Return Example with Real Numbers
You buy a $250,000 rental with 20% down ($50,000) plus $5,000 in closing costs = $55,000 total cash invested. Annual NOI is $16,000; annual mortgage payments are $12,600. Annual cash flow = $3,400. Cash-on-Cash Return = $3,400 / $55,000 × 100 = 6.2%.
Why Cash-on-Cash Return Matters for Investors
Cash-on-cash tells you how efficiently your capital is working. A 6% cash-on-cash return means you're earning $6 per year for every $100 you invested. It lets you compare a leveraged real estate deal against stocks, bonds, or other investments on a fair basis. Many experienced investors target 8–12% cash-on-cash as a minimum threshold.
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Frequently Asked Questions
What is a good cash-on-cash return?
Most investors target 8–12%. In expensive coastal markets, 4–6% is more common. Below 4% is generally considered weak unless you expect strong appreciation. Above 15% usually means higher risk.
Does cash-on-cash include appreciation?
No. It measures only actual cash received relative to cash invested. Appreciation is separate. Total return includes both cash flow and equity growth.
How is cash-on-cash different from ROI?
Cash-on-cash is a simpler, single-year cash flow metric. ROI typically attempts to capture total return including equity paydown and appreciation, making it a broader but less immediately actionable number.
Should I include principal paydown in cash-on-cash?
Traditionally no — cash-on-cash is strictly a cash measure. Principal paydown builds equity but is not cash in your pocket. Include it in a total return calculation instead.
Related Terms
NOI (Net Operating Income)
Net Operating Income (NOI) is the annual income a property generates after all operating e…
Cap Rate
Cap rate (capitalization rate) is the ratio of a property's annual net operating income (N…
Cash-on-Cash Return Formula
The cash-on-cash return formula calculates the annual return on the actual cash you invest…
ROI Formula for Real Estate
The ROI (return on investment) formula for real estate calculates the total percentage ret…
Cash Flow in Real Estate
Cash flow in real estate is the net money remaining after all property income has been col…