Cash-on-Cash Return: How to Calculate
Cash-on-cash return (CoC) measures the annual percentage return you earn on the actual cash you invested in a rental property. Unlike cap rate (which ignores financing), cash-on-cash accounts for your mortgage, making it the most practical metric for investors who use leverage. It answers the simple question: "How much money am I making on the money I put in?"
The formula
Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested
Annual pre-tax cash flow = Net Operating Income (NOI) minus annual debt service (mortgage payments).
Total cash invested = Down payment + closing costs + any immediate repairs.
Worked example
You buy a rental property for $150,000 with 25% down ($37,500). Closing costs are $4,000. You invest $8,000 in initial repairs. Total cash invested: $49,500.
The property rents for $1,400/month. After vacancy (7%), taxes, insurance, maintenance, management, and reserves, your NOI is $9,600/year. Your mortgage payment (P&I on $112,500 at 7%, 30 years) is $749/month or $8,988/year.
Annual cash flow = $9,600 − $8,988 = $612
Cash-on-cash return = $612 ÷ $49,500 = 1.24%
This is a low cash-on-cash return. The property barely cash flows after the mortgage. In this market, you would need to either find a lower purchase price, negotiate better terms, or target a different market with stronger rent-to-price ratios.
What is a good cash-on-cash return?
| CoC Return | Rating | Context |
|---|---|---|
| Under 4% | Poor | Barely covering costs. Stocks may offer better returns. |
| 4-8% | Moderate | Acceptable in appreciating markets where total return compensates. |
| 8-12% | Good | Strong cash flow. Target range for most rental investors. |
| 12-15% | Excellent | Outstanding deal. Usually requires buying below market. |
| 15%+ | Exceptional | Rare. Verify the numbers twice. |
Most rental investors target 8-12% cash-on-cash return. Below 4%, the investment barely justifies the effort and risk. Above 15%, double-check your assumptions because numbers this high often indicate missed expenses.
How leverage affects cash-on-cash
Leverage amplifies returns in both directions. A property with an 8% cap rate can produce higher or lower cash-on-cash depending on your loan terms:
- All cash purchase (no leverage): CoC = cap rate = 8%
- 75% LTV at 6% interest: CoC might be 10-12% (leverage boosts return)
- 75% LTV at 9% interest: CoC might be 3-5% (high interest rate erodes cash flow)
Leverage works for you when the cap rate exceeds the cost of debt (interest rate). It works against you when the interest rate exceeds the cap rate.
Cash-on-cash vs. total return
Cash-on-cash only measures cash flow. Total return includes appreciation, principal paydown, and tax benefits. A property with a 5% cash-on-cash return might have a 20%+ total return when you factor in 4% appreciation ($6,000/year on a $150,000 property), $2,400/year in principal paydown, and $3,000/year in tax savings from depreciation.
Cash flow investors prioritize cash-on-cash. Total return investors accept lower cash-on-cash in appreciating markets. Both approaches are valid — know which camp you are in. See our complete ROI guide.
Related articles
- Cap Rate: The Complete Guide
- Rental Property Analysis: Step by Step
- Real Estate ROI Guide
- How to Buy a Rental Property
- How to Finance an Investment Property