Cash‑on‑Cash Return: What It Is and How to Use It

If you’re eyeing a rental property, the first question is simple: will it make you money? The cash‑on‑cash return gives you a clear answer without diving into tax codes or future price hikes. It tells you how much cash you earn each year compared to the cash you actually put into the deal.

How to Calculate Cash‑on‑Cash Return

All you need is a basic formula: Cash‑on‑Cash = (Annual Pre‑Tax Cash Flow ÷ Total Cash Invested) × 100%. "Annual pre‑tax cash flow" is the rent you collect minus all operating expenses, property taxes, insurance, and debt service for one year. "Total cash invested" includes your down payment, closing costs, rehab budget, and any other out‑of‑pocket expenses.

Example: You buy a duplex for $300,000 with a 20% down payment ($60,000). Closing and rehab costs add another $10,000, so your total cash outlay is $70,000. After a year, the property generates $24,000 in rent, but you pay $8,000 in expenses and $9,600 in mortgage payments. That leaves $6,400 in cash flow. Plugging the numbers in: ($6,400 ÷ $70,000) × 100% = 9.1% cash‑on‑cash return.

Why Cash‑on‑Cash Matters

Investors love this metric because it’s fast, easy, and based on real cash. It lets you compare two properties side by side, even if they’re in different markets or have different financing structures. A higher cash‑on‑cash number usually means a better immediate return, which is crucial if you need the income to cover other expenses or fund new deals.

But remember, cash‑on‑cash doesn’t account for long‑term appreciation, tax benefits, or changes in the loan balance. It’s a snapshot, not the whole story. Use it alongside other tools like cap rate, IRR, or a simple cash flow projection to get a fuller picture.

Here are three quick ways to boost your cash‑on‑cash return:

• Increase rent wisely: Upgrade kitchens or add laundry facilities to justify a higher monthly rate.
• Trim expenses: Shop around for cheaper insurance, negotiate service contracts, or handle minor maintenance yourself.
• Leverage smarter: A slightly higher loan‑to‑value ratio reduces the cash you need upfront, raising the cash‑on‑cash figure—just keep an eye on the debt service.

When you’re evaluating a new property, start by listing every cash outlay, estimate realistic cash flow, then run the formula. If the result falls below your target—say 8% for a low‑risk rental—you can either walk away or look for ways to improve the numbers before you commit.

In short, cash‑on‑cash return is your go‑to metric for quick, cash‑focused decisions. Keep it simple, run the numbers, and use the result as a trigger to dig deeper or move on. Happy investing!