Cash on Cash Return Calculator

The most common way this metric is inflated is by understating the cash that went in.

The down payment is obvious. Closing costs — loan origination, appraisal, title, inspection, transfer taxes — typically run 2% to 5% of the purchase price and are just as real.

Initial repairs and make-ready work belong in too. Money spent before the first tenant is capital deployed, whether it went to the seller or to a contractor.

Holding costs during a renovation count as well: mortgage payments, taxes and utilities paid while the property produced nothing.

What does not belong: the loan amount. That is the bank's money and including it would turn cash-on-cash into something closer to a cap rate.

The rule is simply everything that left your account to get the property producing. Understating it by $15,000 on a $95,000 investment overstates the return by nearly a fifth, which is enough to turn a marginal deal into an attractive-looking one.

The mistake is treating these as competing answers. They are different questions. A property can have a strong cap rate and weak cash-on-cash simply because the financing is expensive — that is information about the loan, not about the building.

Cap rate —

NOI over purchase price, ignoring financing. Compares properties. Unaffected by how you paid.

Cash-on-cash —

cash flow over cash invested. Compares deals. Changes entirely with the financing.

Total return —

cash flow plus principal paydown plus appreciation plus tax benefit. The complete picture and the most assumption-dependent.

DSCR —

NOI over debt service. Below 1.0 the property cannot pay its own mortgage. Lenders want 1.2 or better and so should you.

IRR —

accounts for the timing of every cash flow including the eventual sale. The right tool when there is an exit in view.

Payback period —

how many years of cash flow to recover the investment. Crude, and a useful reality check on an optimistic-sounding return.

Cash-on-cash is highly sensitive to the down payment, and not always in the direction people expect.

More leverage means less cash invested, which raises the return — but it also means a larger mortgage payment, which lowers cash flow. Which effect dominates depends on whether the property's yield exceeds the borrowing rate.

When the cap rate is above the mortgage rate, leverage is accretive: borrowing more raises cash-on-cash. When the mortgage rate is above the cap rate — the situation across much of the US market in recent years — leverage is dilutive, and every extra dollar borrowed reduces the return.

This is why the same property can show 8% cash-on-cash at 25% down and 3% at 20% down in a high-rate environment. The arithmetic reverses when rates fall.

The risk side is the part that gets less attention. High leverage amplifies returns and amplifies the consequences of a vacancy. A property covering its costs at 20% down may not at 10%, and the mortgage payment continues either way.

There is no universal threshold, and quoted targets tell you more about the era than about the metric.

For years the conventional target was 8% to 12%, which was achievable when mortgage rates were low and prices had not fully adjusted. At higher rates, positive cash flow at all has become difficult in many markets, and investors accepting 4% to 6% are not necessarily doing badly.

The right comparison is what else the money could do. A cash-on-cash return below what a savings account pays, on an illiquid asset requiring active management, is difficult to justify on cash flow alone — though it can still make sense if you are explicitly buying appreciation and paydown.

The honest way to use this metric is alongside the others: cash-on-cash for what the money earns now, DSCR for whether the property is safe, and total return for whether the investment is worthwhile. Any one of them alone will mislead.