Cash-on-Cash Return Explained (With Real Numbers)

Definition

Cash-on-cash return measures annual pre-tax cash flow against the total cash you put into the deal. Unlike cap rate, it takes your mortgage into account — so it changes when your down payment, interest rate, or loan term change, even though the property does not.

It is the closest single number to 'what is this investment paying me on the money I actually spent.'

The formula

Cash-on-cash return = Annual pre-tax cash flow ÷ Total cash invested.

Annual cash flow is NOI minus annual debt service. Total cash invested is your down payment plus closing costs plus any up-front rehab needed to make the property rentable.

Worked example

Purchase price $325,000, 20% down ($65,000), closing costs $9,750, 30-year loan at 7.0% on $260,000. Monthly principal and interest is roughly $1,730, or about $20,760 a year.

Income: $2,200 rent per month, 5% vacancy, so effective annual income is about $25,080. Operating expenses: taxes $270/mo, insurance $120/mo, management 8% of collected rent, maintenance reserve 5%. That is roughly $8,000 a year, leaving NOI near $17,080 — a cap rate of about 5.3%.

Cash flow: $17,080 − $20,760 = about −$3,680 a year. Total cash in: $74,750. Cash-on-cash return is roughly −4.9%. Same building, positive cap rate, negative return to you — that gap is the mortgage.

Change one input — 35% down instead of 20% — and the loan shrinks, debt service falls to about $16,900, cash flow turns slightly positive, and cash-on-cash climbs above zero on a much larger cash outlay. Leverage cuts both ways.

Why it differs from cap rate

Cap rate values the asset; cash-on-cash values your position in it. When your borrowing cost is below the cap rate, leverage amplifies your return above the cap rate. When borrowing costs sit above the cap rate — common in a high-rate market — leverage drags your return below it, sometimes into negative territory.

This is why deals that 'penciled' three years ago do not pencil now on identical rents.

Calculate yours

Field ROI computes cash-on-cash return live as you change down payment, rate, and term, so you can find the financing structure where a deal actually works.