Skip to content

How cash-on-cash return works

By Jude Wallis

Cash-on-cash return is annual pre-tax cash flow divided by the cash invested to buy the property. $1,960 of cash flow on $80,000 of cash invested is 2.45 percent. The same $1,960 on $60,000 of cash invested is 3.2667 percent.

Cap rate

7.50%

At a 6 percent cap the same income is worth $600,000.00, which is $120,000.00 above this price.

Net operating income
$36,000.00
Price
$480,000.00
Cap rate on this price
7.50%
Value at 6% cap
$600,000.00
Amount this price sits below that value
$120,000.00
$

Rent minus operating costs, before debt service and tax.

$
%

The cap you would pay. Implied value is income divided by this rate.

On this page

Next on Models and deals

Gross rent multiplier

In short

  • Cash-on-cash is a quotient: annual cash flow over cash invested.
  • $1,960 on $80,000 is 2.45 percent.
  • The same $1,960 on $60,000 is 3.2667 percent, because the denominator shrank.
  • Cap rate uses NOI and purchase price. Cash-on-cash uses leftover cash and the equity cheque. They move for different reasons.

A cash yield on the equity cheque

Cash-on-cash return asks how much cash the property threw off this year, as a percent of the cash the buyer actually put in:

cash-on-cash=annual cash flowcash invested\text{cash-on-cash} = \frac{\text{annual cash flow}}{\text{cash invested}}

On $1,960 of cash flow and $80,000 of cash invested, the return is 2.45 percent.

Cash invested is typically down payment plus closing costs paid in cash, minus credits. This sheet treats it as a single input. How rental cash flow works is where the $1,960 came from.

A smaller cheque, a larger percent

Keep cash flow at $1,960 and cut cash invested to $60,000. The quotient is 3.2667 percent. The property did not throw off more cash. The buyer put in less cash, usually by borrowing more.

That is why cash-on-cash can rise while risk rises. More debt can lift the percent and also lift the chance that cash flow turns negative. How leverage ratio works is the balance-sheet view of that debt.

The cap rate calculator on this page is NOI over price, which does not know the equity cheque. Cap rate and cash-on-cash are both yields. They are not the same yield.

Not an IRR, and not a cap rate

Internal rate of return uses the full cash-flow path, including sale. Cash-on-cash is one year's leftover over the cash that went in. How NPV and IRR work is the full-path object.

Cap rate uses purchase price in the denominator and NOI in the numerator. Cash-on-cash uses cash invested and cash flow after debt service. A cheap loan can lift cash-on-cash while cap rate, which ignores the loan, does not move.

Cash flow is the numerator. If that numerator is negative, cash-on-cash is negative, which means the equity cheque is being fed, not paid.

Scope of this sheet

The two teaching rows are $1,960 on $80,000, which is 2.45 percent, and $1,960 on $60,000, which is 3.2667 percent. They are not a closing-cost inventory, not tax, and not a sale. This is educational material, not financial advice.

Worked examples

2.45 percent on \$80,000 invested

Annual cash flow is $1,960. Cash invested is $80,000. What is cash-on-cash return?

  1. Divide $1,960 by $80,000.
  2. The quotient as a percent is 2.45 percent.

Cash-on-cash return is 2.45 percent on $1,960 of cash flow and $80,000 of cash invested.

3.2667 percent on \$60,000 invested

Annual cash flow is still $1,960. Cash invested is $60,000. What is cash-on-cash return?

  1. Divide $1,960 by $60,000.
  2. The quotient as a percent is 3.2667 percent.

Cash-on-cash return is 3.2667 percent on $1,960 of cash flow and $60,000 of cash invested.

Common questions

Should I round 3.2667 percent to 3.27 percent?

This sheet prints 3.2667 percent so the quotient matches the division. A later round-off is a display choice. It is not a different return.

Does a higher cash-on-cash return mean a better property?

It means more cash this year per dollar of cash invested. It does not price vacancy risk, capex, rate resets, or the sale. Compare it with cap rate and with the loan terms, not in isolation.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.