Cash-on-Cash Return Explained: The Number That Accounts for Your Mortgage

Cash-on-cash return answers a narrower, more personal question than cap rate does: on the actual cash you put into this deal, down payment, closing costs, initial repairs, what percentage return are you earning each year? Unlike cap rate, it accounts for your mortgage payment. Two investors buying the identical property with different financing will get two different cash-on-cash numbers.

The formula

Cash-on-cash return = Annual Pre-Tax Cash Flow divided by Total Cash Invested. Annual cash flow is NOI minus the full mortgage payment (principal and interest), the part cap rate deliberately leaves out. Total cash invested is everything you actually paid out of pocket to close: down payment, closing costs, and any immediate repair costs.

A worked example

Take that same $300,000 duplex with $24,000 in NOI. A buyer puts 25% down ($75,000), plus $6,000 in closing costs and $4,000 in immediate repairs, for $85,000 total cash invested. The mortgage on the remaining $225,000 runs $1,500 a month, or $18,000 a year.

$24,000 NOI minus $18,000 in debt service leaves $6,000 in annual cash flow. $6,000 divided by $85,000 comes out to about 7%. Notice this property had an 8% cap rate but only a 7% cash-on-cash return, because the mortgage payment eats into what actually lands in the buyer's pocket.

Why it can disagree with cap rate

A property can carry a strong cap rate and a weak cash-on-cash return if the financing is expensive relative to the rents (a high rate, a small down payment, or both). The reverse happens too: a lower cap rate deal financed well, more money down, a strong rate, can produce a better cash-on-cash return than a "hotter" deal with thin financing.

What counts as good

• Below 5%: thin. Fine for a deal you're buying mainly for appreciation, less fine if cash flow is the whole point.
• 6% to 10%: the range most buy-and-hold investors aim for on a financed deal.
• 10%+: strong, and worth double-checking the assumptions. A number that high sometimes comes from an optimistic rent estimate or an expense line that's missing something.

Run it on your own numbers

Cash-on-cash return changes with every financing scenario, so it's worth running more than once. RentLedger's calculator lets you test different down payments and rates against the same property, alongside cap rate and DSCR, before you commit.