The cash-on-cash formula
Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested
Annual pre-tax cash flow is the rent you collect in a year minus operating expenses and mortgage payments. Total cash invested is everything that came out of your pocket to get the property rented: down payment, closing costs, loan points and any repairs you paid for in cash.
A worked example
A property rents for $2,400 a month. Operating expenses, including an allowance for vacancy, average $800, and the mortgage is $1,200. That leaves $400 a month, or $4,800 a year. If you invested $75,000 in total, the cash-on-cash return is $4,800 ÷ $75,000 = 6.4%.
Cash-on-cash vs. cap rate vs. total return
- Cap rate ignores financing. It describes the property.
- Cash-on-cash includes financing. It describes your deal.
- Total return (IRR) adds loan paydown and appreciation over the years you hold. Cash-on-cash only counts the cash that reaches your account.