- What's the formula for cash-on-cash return?
- Cash-on-Cash % = Annual cash flow before tax ÷ Total cash invested × 100. Annual cash flow = rental income − operating expenses − annual mortgage payment. Cash invested = down payment + closing costs + initial repairs. Example: $24,000 rent − $6,000 opex − $17,963 annual mortgage = $37 annual cash flow. Cash invested = $75,000 down + $9,000 closing + $3,000 repairs = $87,000. CoC = 37 ÷ 87,000 × 100 ≈ 0.04%. That razor-thin number is the point of the calculator — high price + 7% rates squeeze leveraged returns to nothing.
- How is cash-on-cash different from cap rate?
- Two big differences. (1) Cap rate uses Net Operating Income (NOI) — rent minus operating expenses, BEFORE financing. Cash-on-cash uses cash flow AFTER the mortgage payment. (2) Cap rate divides by the full property value. Cash-on-cash divides by only the cash you actually invested. So cap rate tells you the unleveraged yield of the property as an asset; cash-on-cash tells you the return on your specific cash position with your specific financing. For all-cash purchases, the two converge (you get a higher CoC because closing costs are usually less than 100% of price, but they're close). For leveraged purchases, they diverge dramatically — both higher (rent covers mortgage and then some) and lower (rent doesn't cover the mortgage, CoC goes negative even at a positive cap rate).
- What's a good cash-on-cash return?
- Depends on market, asset class, risk, and the alternative. Common thresholds investors target: 8% as a minimum for an acceptable deal, 10–12% as a solid deal, 15%+ as exceptional (often a value-add or BRRRR play). For comparison: a 10-year Treasury yields around 4–5%; the S&P 500 averages ~10%/year long-term with no work; high-yield savings accounts hit 4–5% in recent years. Real estate's edge over those alternatives needs to compensate for the work (tenant management, repairs, vacancies), the illiquidity, the concentration risk, and the leverage risk. A 3–5% CoC on a leveraged rental usually doesn't clear that hurdle once you price in your time.
- Why is the answer often near zero (or negative) at today's rates?
- Because residential rental yields haven't risen as fast as mortgage rates. A 7% mortgage on 75% LTV consumes about 5.25% of the property price annually just in debt service (it's actually more in the early years because you're also paying interest on the principal). If the property's gross rental yield is 6% and opex eats 25% of rent (leaving 4.5% net), the leveraged cash flow is negative before you've replaced a single appliance. This was less true at 3% rates — the same math left meaningful cash flow. The calculator surfaces this honestly; it doesn't massage the numbers to make the deal look better than it is.
- Does cash-on-cash include appreciation or principal paydown?
- No — and this is the metric's biggest limitation. Cash-on-cash only counts pre-tax cash that hits your bank account this year. It ignores three real sources of return on a rental: (1) principal paydown — every monthly payment builds equity, typically $2,000–5,000/year in the early years of a 30-year mortgage on a $300k property; (2) appreciation — historically ~3–4%/year on residential US real estate, though this varies wildly by market; (3) depreciation tax shield — IRS lets you deduct ~3.6% of building value per year. A more complete measure is the unlevered IRR or the total return on investment, which factor in these accumulating gains. Use cash-on-cash for the cash-flow comparison; use a fuller model before buying.
- How should I estimate operating expenses if I don't have actuals?
- Two reasonable starting heuristics. (1) The 50% rule: assume opex (excluding mortgage) is 50% of gross rent — so $24k rent → $12k opex. This is conservative for newer properties in stable markets and aggressive for older or rural ones. (2) Itemize: property tax (look up actual recent assessment), insurance ($800–$2,000/yr for a typical SFH), maintenance (1–2% of property value per year on average — much higher for old houses), property management (8–10% of rent if hired out), vacancy reserve (5–10% of rent), capital expenditure reserve ($200–500/mo on average). For a deal under contract, demand the seller's actual P&L and adjust upward — sellers almost always understate maintenance.
- Should I use gross rent or adjusted (after-vacancy) rent?
- Always use adjusted. Gross rent is the listing price × 12; that's the upside case. Real rent over a multi-year hold includes vacancy (typical 5–10%), bad debt (~1%), and occasional concessions. A reasonable default is to multiply gross rent by 0.92–0.95 before plugging into this calculator. The calculator doesn't model vacancy explicitly because it's already absorbed into the input — pre-adjust the rent figure and you get an honest answer.
- What about taxes — is the answer pre-tax or after-tax?
- Pre-tax. Cash-on-cash by convention is a before-tax metric. For an after-tax figure you'd need to model: (1) the mortgage interest deduction (sharply reduced for higher earners post-2017 TCJA but still relevant), (2) the depreciation deduction (3.636% of building value, excluding land), (3) the deductible operating expenses, (4) your marginal tax rate. Most investors using cash-on-cash use it as a pre-tax comparison metric and then layer tax analysis on top separately. The depreciation shield in particular can convert a low-CoC property into a meaningfully higher after-tax return — a real-estate-specific advantage worth quantifying before deciding.
- Can cash-on-cash be over 100%?
- Mathematically yes — and it's the goal of the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat). If you buy distressed, force appreciation via rehab, then cash-out refinance to pull most of your invested cash back out, your remaining cash invested can shrink to near zero while cash flow stays positive. CoC = positive cash flow ÷ tiny remaining cash = a very large percentage. The metric becomes less informative in that regime (any divide-by-near-zero is) but it's how real estate investors talk about 'infinite returns' deals. The calculator handles down-payment-of-100% (all-cash) and tiny cash-invested cases without crashing.
