What Is Cash on Cash Return?
Cash on cash return (CoC) measures the annual pre-tax cash income you earn relative to the total cash you invested in a property. Unlike cap rate, which ignores financing, cash on cash return directly reflects the impact of your mortgage, down payment, and leverage strategy.
It answers the simple question: "For every dollar I put in, how many cents am I getting back each year?" A 10% cash on cash return means you earn 10 cents per year for every dollar invested. This is arguably the most important metric for rental property investors because it measures the return on your actual money, not the property's overall performance.
How to Calculate Cash on Cash Return
The formula is simple:
Cash on Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100
Annual Pre-Tax Cash Flow is your net rental income after all expenses — including mortgage payments, property taxes, insurance, maintenance, management, vacancy, and any other operating costs. It is the money that goes into your pocket each year.
Total Cash Invested is the sum of your down payment, closing costs, and any out-of-pocket renovation or repair expenses. It represents every dollar you put into the deal.
Example: You purchase a property for $300,000 with 20% down ($60,000) and $7,500 in closing costs. Your total cash invested is $67,500. After a year of renting, your net cash flow is $10,200. Your cash on cash return is ($10,200 / $67,500) x 100 = 15.1%.
What Is a Good Cash on Cash Return?
The "right" number depends on your market, strategy, and risk tolerance. Here are widely used benchmarks:
Below 4% — Low Yield
The property may still be a good investment if you expect significant appreciation, but the cash returns alone are barely beating a savings account. Typical in high-cost markets like San Francisco or New York.
8% - 12% — Sweet Spot
Most experienced investors target this range. It provides meaningful cash flow while still being achievable in many markets. At 10%, you recoup your entire investment in 10 years from cash flow alone.
Above 12% — High Yield
Excellent if the numbers are real. Returns this high typically come from value-add plays, creative financing, or below-market acquisitions. Verify your expense assumptions and stress-test for vacancy.
Cash on Cash Return vs. Cap Rate
These two metrics are often confused but measure very different things:
| Cash on Cash Return | Cap Rate | |
|---|---|---|
| Includes financing? | Yes (after mortgage) | No (ignores mortgage) |
| Numerator | Annual cash flow | Net Operating Income (NOI) |
| Denominator | Cash invested | Property value |
| Best used for | Evaluating your personal return | Comparing properties objectively |
| Affected by leverage? | Yes — more leverage can increase CoC | No |
Smart investors use both. Cap rate helps you screen and compare properties. Cash on cash return tells you how effectively your capital is deployed. For the complete picture, let Proformatic run both calculations automatically.
Frequently Asked Questions
Is cash on cash return before or after taxes?
Cash on cash return is typically calculated on a pre-tax basis. Your actual after-tax return depends on your tax bracket, depreciation deductions, and other factors unique to your situation. Consult a tax professional for after-tax analysis.
Does cash on cash return include appreciation?
No. Cash on cash return only measures the cash income you receive — it does not factor in property appreciation, loan paydown, or tax benefits. These "phantom returns" can be significant but require a more comprehensive analysis (like a full proforma) to capture.
How does leverage affect cash on cash return?
Leverage can dramatically increase your cash on cash return. If you buy a property all cash, your CoC equals the cap rate. But if you put 20% down and the property yields enough to cover the mortgage and still cash flow, your CoC can be much higher than the cap rate because your denominator (cash invested) is smaller. Of course, leverage also amplifies losses if the deal goes south.
What should I include in "total cash invested"?
Include every dollar you spend out of pocket to acquire and prepare the property: down payment, loan origination fees, closing costs, inspection costs, appraisal fees, and any upfront renovation or repair costs. Do not include the borrowed portion of the purchase price — only your actual cash outlay.
Can cash on cash return be negative?
Yes. If your annual expenses (including mortgage) exceed your rental income, your cash flow is negative, and your cash on cash return will be negative. This means you are subsidizing the property out of pocket. While some investors accept negative cash flow in appreciation-focused markets, it adds risk and reduces liquidity.