Quick answer
Cash-on-cash return is an investment metric that compares annual cash flow to the amount of cash invested. It helps investors understand the cash yield on their actual invested dollars.
It is different from cap rate because it can include financing effects and owner-specific cash invested.
Cash-on-cash return formula
The common formula is:
Annual cash flow divided by total cash invested equals cash-on-cash return.
If annual cash flow is $6,000 and total cash invested is $100,000, the cash-on-cash return is 6%.
What cash invested can include
Cash invested may include down payment, closing costs, initial repairs, make-ready costs, and other upfront cash contributions.
Investors should be consistent when comparing properties.
What the metric tells owners
Cash-on-cash return helps owners understand whether the property is producing cash relative to the capital they put in.
It can be useful for comparing financed rental properties with different loan structures.
Limitations to remember
Cash-on-cash return does not tell the full story. It may not include appreciation, depreciation, tax effects, principal paydown, major future repairs, or risk.
Owners should pair it with cash flow, reserves, condition, rent demand, and local market review.
Related resources
- Rental Investing Terms category
- What is cap rate?
- What is rental property cash flow?
- What affects rental income?
- Rental Revenue Calculator
Frequently asked questions
Is cash-on-cash return before taxes?
It is often calculated pre-tax, but investors should define assumptions clearly.
Does financing affect cash-on-cash return?
Yes. Loan terms can affect cash flow and cash invested.
Is cash-on-cash return the same as ROI?
No. ROI can be broader and may include appreciation or total return.
Can cash-on-cash return be negative?
Yes. If annual cash flow is negative, the return can be negative.