Cash-on-Cash Return: What It Is, How to Calculate It, and What's a Good Number

Cash-on-cash return (CoC) is the metric every residential real estate investor should understand before buying a single rental property. It measures what your cash actually earns relative to the cash you actually invested — and when calculated correctly, it tells you things cap rate doesn't.

The Basic Formula

Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested

That's it. The complexity is in calculating both numbers correctly.

Calculating Annual Pre-Tax Cash Flow

Cash flow is what's left after every dollar that leaves your account. Most investors get this wrong because they stop subtracting too early.

Start with: Gross annual rent (assuming full occupancy)

Subtract:

1. Vacancy allowance — even a great property with a great tenant should carry 5–8% vacancy. Model 8% unless you have years of data showing otherwise
2. Property management — 8–12% of collected rents if you self-manage today, use 10% anyway. Your time has a cost. Projections that survive a vacation pass the test
3. Maintenance and repairs — budget 1% of property value annually for ongoing repairs. This is not a pessimistic assumption; it's the historical average
4. Capital expenditures (CapEx) reserve — budget 1–2% of property value annually for big-ticket replacements (roof, HVAC, appliances, water heater). Not money you spend every year; money you set aside so you have it when you need it
5. Insurance — annual premium
6. Property taxes — annual amount
7. HOA fees — if applicable
8. Any utilities paid by landlord — water, trash, lawn in some markets
9. Mortgage payment (principal + interest) — your annual debt service

What remains is your annual pre-tax cash flow. This number can be — and often is — negative in today's high-rate, high-price environment. That is important information.

Example Calculation

Property: $350,000 purchase price Down payment: 25% ($87,500) Loan: $262,500 at 7.0%, 30 years → monthly payment ~$1,747 Gross monthly rent: $2,400 ($28,800/year)

Cash-on-cash return: -$10,148 ÷ $87,500 = -11.6%

This is a property that looks like it cash flows on the surface ($2,400 rent, $1,747 mortgage = $653 "profit") but actually loses money when analyzed correctly. Millions of investors buy properties like this every year without realizing it.

Total Cash Invested

This is not just the down payment. Total cash invested includes every dollar you deploy at purchase:

• Down payment
• Closing costs (typically 2–5% of purchase price for a buyer)
• Renovation or rehab costs (if applicable)
• Carrying costs during vacancy/rehab
• Any reserves required by the lender

If you close on a $350,000 property with 25% down + $8,000 in closing costs, your cash invested is $95,500 — not $87,500. That changes your CoC return.

What's a Good Cash-on-Cash Return?

There is no universal answer, but here are practical benchmarks:

Under 5%: Generally not worth the work and risk of owning real estate. You can get close to this in treasury bonds without tenants, toilets, or leaky roofs.

5–8%: Acceptable in certain markets, particularly where appreciation potential is high (appreciation doesn't show in CoC, but it's real). Many investors in coastal or high-growth markets accept lower CoC in exchange for equity growth.

8–12%: This is the range where most experienced investors are satisfied with a buy-and-hold rental.

12%+: Excellent. Usually achieved through significant value-add (BRRRR strategy, distressed properties) or in lower-cost markets with strong rent-to-value ratios.

What Cash-on-Cash Doesn't Capture

CoC is a cash flow metric. It does not capture:

• Appreciation — property value growth
• Principal paydown — your tenant is paying down your mortgage every month; that's equity accumulation
• Tax benefits — depreciation, mortgage interest deduction
• Refinancing potential — in a BRRRR, you may be able to pull your cash back out entirely

A complete return picture requires looking at total return including these factors, which is what a 10-year IRR calculation captures. But CoC is the right first filter: if a property doesn't cash flow, you need a compelling reason to buy it.

The Leverage Effect

CoC is specifically a leveraged metric. The same property purchased all-cash will have a different CoC return (and a lower one, typically — that's the cap rate). The gap between your all-cash return (cap rate) and your leveraged return (CoC) tells you whether debt is helping or hurting you.

When the cap rate exceeds your loan interest rate, leverage improves your return. When the cap rate is below your interest rate (which is common in today's environment), leverage destroys return. This is exactly why many markets that penciled out at 3.5% rates do not work at 7%.

Running the Numbers Before You Make an Offer

The only time to run this analysis is before you write an offer — not after, when you're emotionally committed to closing. Our Real Estate Investment Analyzer automates this calculation: input the purchase price, financing terms, rents, and expenses, and it computes CoC, cap rate, DSCR, and a 10-year cash flow projection automatically. You can compare up to 5 properties side by side.

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Related reading: How to Calculate Cap Rate · BRRRR Strategy Explained · Rental Property Cash Flow Guide