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How It Works
Cash-on-cash return measures the actual cash income you earn relative to the cash you put in. Unlike cap rate, it accounts for mortgage payments and shows the real return on your out-of-pocket investment.
This metric is especially useful for leveraged investments. Two properties with the same cap rate can have very different cash-on-cash returns depending on the financing terms.
Example Problem
You invest $50,000 as a down payment on a rental property. After paying the mortgage, taxes, and expenses, the property generates $4,500 in annual cash flow.
- COCR = $4,500 / $50,000 = 0.09
- Multiply by 100: 9%
A 9% cash-on-cash return means you earn 9 cents for every dollar of cash invested each year.
Frequently Asked Questions
What is a good cash-on-cash return for real estate?
Many investors target 8–12% for residential rentals. Returns above 12% are excellent but may carry higher risk. Markets with high appreciation potential often have lower cash-on-cash returns of 4–6%.
How is cash-on-cash different from cap rate?
Cap rate ignores financing and compares NOI to total property value. Cash-on-cash compares actual after-debt cash flow to cash invested. If you buy with a mortgage, your cash-on-cash return will differ from the cap rate.
Does cash-on-cash return include appreciation?
No. It only measures annual cash flow relative to cash invested. Appreciation, principal paydown, and tax benefits are separate components of total return that are not captured in this metric.
Related Calculators
- Capitalization Rate Calculator — compare property returns before financing.
- Return on Equity Calculator — measure returns on your equity position.
- Net Operating Income Calculator — calculate NOI for investment analysis.
- Debt Coverage Ratio Calculator — assess a property's ability to cover debt payments.
Reference: Brueggeman, William B. & Fisher, Jeffrey D. Real Estate Finance and Investments. McGraw-Hill Education.