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Cash-on-cash return on a rental: formula, example and what it leaves out

By Spruce Sheets · Updated November 14, 2026 · 6 min read

Cash-on-cash return answers a practical question: for every dollar you put into a rental, how many cents come back to you in cash each year? It's popular because it's easy to calculate and easy to compare between properties. It's also easy to misuse. This guide covers the formula, two worked examples, how financing changes the result, and the blind spots to keep in mind.

The formula

Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested

• Annual pre-tax cash flow is rent collected minus operating expenses minus the loan payment, for a full year. If you need a refresher, see how to calculate rental property cash flow.
• Total cash invested is everything you paid out of pocket to get the property earning: down payment, closing costs, loan fees, and repairs or furnishing before the first tenant. Don't forget the repairs; leaving them out makes the return look better than it is.

Example 1: a thin deal

We'll reuse the property from our cash flow guide. All numbers are made up for illustration.

Item	Amount
Purchase price	$240,000
Down payment (25%)	$60,000
Closing costs	$6,000
Repairs before renting	$4,000
Total cash invested	$70,000
Net operating income (NOI) per year	$15,004.80
Loan payment per year (30-year, 7.0%, $180,000 loan)	$14,370.53
Annual cash flow	$634.27

Cash-on-cash return = $634.27 ÷ $70,000 = 0.91%.

That's lower than many savings accounts. The property pays its own way, but the cash return on the money you put in is minimal.

The same property bought with cash

Now imagine buying it outright. There's no loan payment, so the annual cash flow equals NOI: $15,004.80. Cash invested becomes $240,000 + $6,000 + $4,000 = $250,000.

Cash-on-cash return = $15,004.80 ÷ $250,000 = 6.00%.

So in this example the loan lowers the cash-on-cash return from 6.00% to 0.91%. That surprises people who've heard that leverage always boosts returns. The next section explains why.

When leverage helps and when it hurts

Borrowing improves cash-on-cash return only when the property earns more on each dollar than the loan costs on each dollar. Two numbers make this concrete:

• What the property earns: NOI ÷ total cost (price plus closing and repairs). In example 1 that's $15,004.80 ÷ $250,000 = 6.00%.
• What the loan costs: the annual payment ÷ the loan amount, sometimes called the loan constant. For a 30-year loan at 7.0% it's 7.98%. It's higher than the interest rate because it includes principal repayment.

Since 6.00% is below 7.98%, every borrowed dollar costs more than it earns, and the cash return on your own money drops. This is called negative leverage.

Example 2: when leverage helps

Same rent, same expenses, but a lower price: $170,000, with $5,000 closing costs and $4,000 in repairs.

Item	With a loan	All cash
Down payment / purchase	$42,500 (25%)	$170,000
Closing costs + repairs	$9,000	$9,000
Cash invested	$51,500	$179,000
Loan	$127,500 at 7.0%, 30 years	none
Monthly loan payment	$848.26	$0
Annual cash flow	$4,825.67	$15,004.80
Cash-on-cash return	9.37%	8.38%

Now the property earns 8.38% on its total cost, above the 7.98% loan constant, so the loan pushes cash-on-cash up from 8.38% to 9.37%. The gap is modest, and it would disappear with a slightly higher rate or a slightly lower rent. That's the honest picture of leverage: it magnifies whatever the property does, good or bad.

A quick worked check you can do on any listing

You don't need a full model to get a first read on cash-on-cash return. With a listing open, write down five numbers: price, a realistic rent from comparable rentals, the annual property tax from the county website, an insurance quote, and the down payment you'd use. Then:

1. Estimate operating expenses. If you have nothing better, add tax and insurance, then 5% of rent each for vacancy, repairs and capital expenses, plus management if you'd use a manager.
2. Subtract them from annual rent to get NOI.
3. Subtract the annual loan payment.
4. Divide by your cash in: down payment, closing costs and any repairs.

If the result is near zero, as in example 1, a bigger down payment rarely fixes it; the property simply earns less than the loan costs. If it's comfortably positive, it's worth a closer look with real expense figures.

Cash-on-cash vs cap rate vs ROI

These three get mixed up all the time:

Measure	Formula	Includes financing?	Time frame
Cap rate	NOI ÷ price	No	One year
Cash-on-cash return	Cash flow ÷ cash invested	Yes	One year
ROI / total return	Depends on who's calculating	Varies	Varies

Cap rate tells you about the property; cash-on-cash tells you about your money in it. When someone quotes an "ROI", ask what's included.

What cash-on-cash return leaves out

Cash-on-cash is a one-year, cash-only snapshot. It ignores:

1. Principal paydown. In example 1, the tenant's rent also pays down about $1,828.46 of loan principal in the first year. Counting that, the first-year return on $70,000 is about 3.52%, but that money is locked in the property until you sell or refinance.
2. Appreciation. Rising property values can matter far more than cash flow over a long hold, but they aren't guaranteed and aren't cash until you sell or borrow against them.
3. Taxes. Depreciation can reduce your taxable rental income, so after-tax cash flow may differ from pre-tax. Rules vary; ask a tax professional. (This guide is not tax advice.)
4. Time. A return of 8% in year one says nothing about year five, when rents, taxes and insurance may all have changed. A multi-year projection with an internal rate of return (IRR) captures that better.
5. Risk. Two properties with the same cash-on-cash return can carry very different risks: one has a new roof and a long-term tenant, the other needs a sewer line next year.

What is a "good" cash-on-cash return?

You'll see target numbers quoted online, but there's no standard that fits every investor. A sensible benchmark is your own alternative: what could the same cash earn elsewhere, at a risk you're comfortable with? Then add a margin for the work and risk of being a landlord. Some investors accept a low cash-on-cash return in expensive, appreciating markets; others want strong cash flow from day one. Decide your own target before you look at deals, so you don't talk yourself into one.

How to use it well

• Compare like with like. Use the same expense assumptions (vacancy, repairs, capex, management) for every property you compare, or the comparison is meaningless.
• Include every dollar you put in, including repairs and loan fees.
• Re-run it under stress. What happens at 5% lower rent, or 1 point higher on the interest rate?
• Pair it with DSCR and cap rate. DSCR shows how safely the property covers its loan; cap rate shows its earning power without financing.
• Track it after you buy. Your real cash-on-cash return comes from your real income and expenses, which is where a bookkeeping spreadsheet earns its keep.

Cash-on-cash and BRRRR

In a BRRRR deal (buy, rehab, rent, refinance, repeat), the refinance can pull most of your cash back out. If very little cash is left in the deal, cash-on-cash return can look huge, or even "infinite" when no cash is left. That's mathematically true but can be misleading: the bigger loan raises your payment and lowers your safety margin. See how to run the numbers on a BRRRR deal.

General information with made-up examples, not financial, investment or tax advice. Interest rates, rents and costs in your market will differ.

Frequently asked questions

What is the formula for cash-on-cash return?

Annual pre-tax cash flow divided by the total cash you invested (down payment, closing costs and upfront repairs), shown as a percentage.

Does cash-on-cash return include appreciation or loan paydown?

No. It only counts the cash the property puts in your pocket in a year. Principal paydown, appreciation and tax effects are left out, which is why it is often paired with a longer-term measure such as IRR.

Is cash-on-cash return the same as ROI?

People use ROI loosely for many different calculations. Cash-on-cash is one specific version, cash flow divided by cash invested, for a single year.

Keep reading

• How to calculate rental property cash flow, step by step
• BRRRR calculator: how to run the numbers on a BRRRR deal
• Cash-out refinance on a rental property: how the numbers really work