How to Calculate Cash-on-Cash Return on a Rental Property

The formula

Cash-on-Cash Return = (Annual Cash Flow ÷ Total Cash Invested) × 100. Annual cash flow is rent minus every expense, including the mortgage payment if there is one. Total cash invested is what actually left your bank account to close the deal — down payment, closing costs, and any repairs paid upfront. Not the purchase price.

Why financing changes the number so much

Take a $200,000 rental renting for $1,800/month, with $714/month in operating expenses (taxes, insurance, vacancy, management, repairs, CapEx) — a Cap Rate of about 6.5%.

• Paid in cash (roughly $204,000 invested including closing costs): $13,032/year in cash flow, a Cash-on-Cash Return of about 6.4%.
• Financed at 6.5% (20% down, about $44,000 invested): the $1,011/month mortgage payment eats nearly all the margin, leaving only about $896/year in cash flow — a Cash-on-Cash Return of roughly 2.0%, despite putting in far less cash.
• Financed at 4.5% (same 20% down): the lower $811/month payment leaves about $3,304/year in cash flow — a Cash-on-Cash Return of roughly 7.5%, beating the all-cash version.

Same property, same rent, three very different answers. The deciding factor is the spread between the property's Cap Rate and the interest rate on the loan — when the loan rate is meaningfully below the Cap Rate, leverage boosts Cash-on-Cash Return ("positive leverage"). When the loan rate is at or above the Cap Rate, leverage can shrink it instead, even though you've put in far less cash.

What Cash-on-Cash Return doesn't capture

It only counts cash that actually changes hands this year. It ignores the portion of every mortgage payment that goes toward principal (which is still building equity, just not cash in your pocket today), and it ignores appreciation entirely. A deal with a mediocre Cash-on-Cash Return can still be a reasonable long-term hold once equity paydown and appreciation are factored in — Cash-on-Cash Return just isolates the cash-flow piece of the return.

How to use it when comparing deals

Because it's so sensitive to financing terms, only compare Cash-on-Cash Return across deals with similar down payment sizes and loan terms — comparing an all-cash offer against a heavily leveraged one will make the leveraged deal look artificially weak or strong depending on the rate environment. For financing-independent comparisons, use Cap Rate instead.