Cash-on-cash return
Cash-on-cash return is the annual pre-tax cash flow a property produces divided by the cash actually invested in it.
$4,680 of annual cash flow on $65,000 invested is 7.2 percent.
What it measures that cap rate does not#
The deal, rather than the property.
Cap rate is calculated before financing, so every buyer of the same property at the same price faces the same cap rate. Cash-on-cash includes debt service, so the same property produces different returns depending on how it was bought.
That makes it the right measure for deciding whether to do a deal, and the wrong one for comparing properties.
Getting the denominator right#
The most common way this number gets flattered.
Cash invested is the down payment, plus closing costs, plus everything spent getting the property rentable — repairs, turnover costs, initial reserves.
Not the loan. Not the purchase price.
An investor who counts only the down payment and ignores the $12,000 of work done before the first tenant moved in is dividing by a number that is too small, and reporting a return that never existed.
Getting the numerator right#
Annual cash flow is NOI minus annual debt service.
Which means every error in NOI flows straight through. Vacancy at zero, no maintenance reserve, no management allowance, property taxes at the pre-sale figure — all of them inflate cash flow, and all of them inflate this return.
Leverage cuts both ways#
The uncomfortable part.
More leverage means less cash invested, which raises cash-on-cash when the property performs. It also means larger debt service, which is fixed while income is not.
A property with 15 percent cash-on-cash produced by very thin coverage is one vacancy away from negative cash flow. A property at 7 percent with substantial coverage absorbs a bad year.
The headline return does not distinguish between those, which is why it should be read alongside DSCR rather than on its own.
What it leaves out#
Principal paydown, which builds equity without appearing in cash flow.
Appreciation.
Tax effects, including depreciation.
Cash-on-cash measures cash in the year, deliberately. It is one input to a decision rather than the whole of it.
You can run the figures on our cash-on-cash calculator, which shows the return alongside the coverage — because a return you cannot sustain is not a return.
Year one is not the steady state#
The figure people quote is usually the first year, and the first year is atypical in both directions.
It understates where a property is still stabilising — a unit vacant during turnover, rents below market on inherited leases, a tenant being replaced.
It overstates where the first year happened to avoid the capital events a reserve is meant to fund. No roof, no furnace, no major turnover. That is not performance; that is a year in which nothing broke.
A more useful reading takes the average across several years, or at minimum applies a full reserve so that the good year is not mistaken for the normal one.
Investors who model on year one and buy on that number are the ones surprised in year three.