Real Estate Glossary
Cash-on-Cash Return Formula: How to Calculate It (With Examples)
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Definition
The cash-on-cash return formula calculates the annual return on the actual cash you invested in a property. It divides annual pre-tax cash flow by total cash invested and expresses the result as a percentage. This formula is widely used by real estate investors because it reflects the actual cash return on their out-of-pocket investment, accounting for the leverage effect of the mortgage.
The Cash-on-Cash Return Formula Formula
Variables explained:
Annual Pre-Tax Cash Flow = annual NOI minus annual mortgage payments (P&I). Total Cash Invested = down payment + closing costs + upfront renovation or repair costs + any carrying costs before the property was rented. This is all the cash you spent to get the property cash-flowing.
Cash-on-Cash Return Formula Example
Purchase price: $320,000. Down payment (25%): $80,000. Closing costs: $6,500. Light repairs before renting: $4,500. Total cash invested = $91,000. Annual NOI: $22,000. Annual mortgage payments (30yr, 7%): $17,064. Annual cash flow = $22,000 − $17,064 = $4,936. Cash-on-Cash = ($4,936 / $91,000) × 100 = 5.4%.
Why Cash-on-Cash Return Formula Matters for Investors
The cash-on-cash formula makes leverage visible. If you bought the same $320,000 property all cash, your return would be $22,000 / $320,000 = 6.9% — but you'd have $229,000 less capital deployed. Leverage in this case slightly reduces the return, which is fine. In other deals, leverage dramatically amplifies returns. Understanding this formula helps you optimize how much leverage to use.
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Frequently Asked Questions
What is included in "total cash invested" for the cash-on-cash formula?
Down payment, closing costs (title, escrow, lender fees, recording fees, inspection), any immediate repair costs needed before renting, and carrying costs (taxes, insurance, utilities) paid before the tenant moved in.
Should I use pre-tax or after-tax cash flow?
Most investors use pre-tax cash flow for simplicity and comparability. After-tax cash flow can be significantly different because of depreciation and other deductions, but it varies by individual tax situation.
What is a good cash-on-cash return using this formula?
8–12% is a common investor benchmark. In expensive markets, 4–6% may be acceptable if strong appreciation is expected. Below 4% is generally considered a weak leveraged return.
How does the formula change for all-cash purchases?
For all-cash purchases, there is no mortgage payment, so Annual Cash Flow = NOI, and Total Cash Invested = purchase price + closing costs. The formula gives you the same result as cap rate (minus the effect of closing costs).
Related Terms
Cash-on-Cash Return
Cash-on-cash return is the ratio of a property's annual pre-tax cash flow to the total cas…
NOI Formula
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ROI Formula for Real Estate
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Cap Rate Formula
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