Quick Answer
Cash-on-cash return measures performance based on your actual out-of-pocket investment, such as your down payment, closing costs, and any renovation costs, rather than the full purchase price. It's calculated by dividing annual cash flow by that invested cash amount. Because financing changes how much cash an investor puts in, cash-on-cash return can vary a lot between an all-cash purchase and a leveraged one, even for the same property.
- Formula
- Yearly cash flow divided by cash invested
- What counts as invested cash
- Down payment, closing costs, and rehab costs
- Affected by financing
- Yes, significantly
- Best for comparing
- Returns across different financing scenarios
How Cash-on-Cash Return Is Calculated
To calculate cash-on-cash return, start with the property's annual cash flow, meaning income after all expenses and the mortgage payment, then divide it by the total cash the investor actually put in. That figure typically includes the down payment, closing costs, and any upfront repair spending, but not the full loan amount.
This makes cash-on-cash return a measure of how hard your actual dollars are working, which is different from cap rate, a metric that looks at the full property value regardless of financing.
Why Financing Changes the Number
Because cash-on-cash return only counts the cash actually invested, using more leverage, meaning a smaller down payment, can increase the calculated return, since less of the investor's own money is tied up, even though the dollar amount of cash flow may be similar or lower. This is why an all-cash buyer and a financed buyer can see very different cash-on-cash figures for the identical property.
Investors typically use cash-on-cash return alongside cap rate and total return projections to get a complete picture, since focusing on cash-on-cash return alone can encourage over-leveraging. Our agents can help connect you with lenders and run realistic numbers on properties across Central Indiana.
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Frequently Asked Questions — Cash-on-cash return
How is cash-on-cash return different from cap rate?
Cap rate looks at income relative to the full property value regardless of financing, while cash-on-cash return looks at income relative to the actual cash you invested, so financing has a big effect on it.
Does a bigger down payment mean a better cash-on-cash return?
Not necessarily. A larger down payment ties up more cash, which can lower the calculated cash-on-cash return even if the property's cash flow stays the same.
Is cash-on-cash return the same as total return?
No. Cash-on-cash return only reflects cash flow, not appreciation, loan paydown, or tax benefits, so it understates total return over the long run.
What counts as cash invested?
Typically the down payment, closing costs, and any upfront repair or renovation costs, though investors should define this consistently when comparing deals.