What is cash on cash return?
Cash on cash return measures the yearly pre-tax cash flow you receive against the cash you actually put into a deal. Unlike cap rate, it includes your mortgage, so it shows how leverage changes your return.
What counts as cash invested?
Everything you paid out of pocket to get the property producing income: the down payment, closing costs, loan fees, repairs before the first tenant and any reserves you had to fund. If you later pull cash out through a refinance, your cash invested goes down and your return goes up.
What is a good cash on cash return?
Many rental investors target 8–12%. Compare it with what the same money would earn elsewhere, such as an index fund or a high-yield savings account, and add a premium for the work and risk of owning property.
Cash on cash vs. total ROI
Cash on cash return only counts cash flow. Total return also includes loan paydown, appreciation and tax benefits like depreciation, so a deal with a modest cash on cash return can still build significant wealth over time.
Frequently asked questions
Is cash on cash return the same as ROI?
No. ROI usually includes appreciation, equity from loan paydown and sometimes tax savings. Cash on cash return only looks at cash flow in one year relative to cash invested.
Should I use cash on cash or cap rate?
Use cap rate to compare properties and judge the price. Use cash on cash return to judge your own deal with your loan terms.
Does cash on cash return include taxes?
Normally no. It is a pre-tax figure. Depreciation often makes the after-tax return on rentals higher than the pre-tax number.