Cash-on-Cash Return Explained: Formula + Real-Life Examples
- 4 days ago
- 3 min read
Cash-on-Cash Return Explained: What It Is and Why It Matters for Real Estate Investors
Understanding cash-on-cash return is key for real estate investors who want to measure how much income a property generates compared to the cash they’ve invested. It’s a straightforward metric, but many explanations stop at the formula without showing how it works in real scenarios.
In this post, you’ll find cash-on-cash return explained with both the formula and real-life examples — plus a simple calculator to help you run your own numbers. Whether you're reviewing your first rental deal or comparing multiple properties, this guide will help you make more informed investment decisions.
What Is Cash-on-Cash Return?
Cash-on-cash return measures the annual return made on the cash invested in a property. It's a helpful metric to assess how well your investment is performing relative to the actual money you've put in.
Cash-on-Cash Return Formula
Here’s the basic formula used to get cash-on-cash return explained clearly:
What Counts as Total Cash Invested?
Down payment
Closing costs
Renovation/improvement costs
Any other out-of-pocket costs
Pro Tip: Mortgage principal payments do not count toward the return, since they build equity but don’t affect immediate cash flow. Not sure how to finance it? Check out this guide on financing an investment property via Investopedia.
Example #1: A Single-Family Rental Property
Purchase Price: $300,000
Down Payment (25%): $75,000
Closing Costs: $5,000
Renovations: $10,000
Total Cash Invested: $90,000
Monthly Rent: $2,000
Monthly Expenses (loan, maintenance, taxes): $1,400
Monthly Cash Flow: $600
Annual Pre-Tax Cash Flow: $7,200
Result: An 8% return — this gives a quick snapshot of how well your cash is working.
"Cash-on-cash return... provides a clear view of how much income your invested capital generates annually."
Example #2: A Duplex with Higher Returns
Purchase Price: $400,000
Down Payment (20%): $80,000
Closing + Rehab Costs: $15,000
Total Cash Invested: $95,000
Monthly Rent (2 units): $3,600
Monthly Expenses: $2,300
Monthly Cash Flow: $1,300
Annual Cash Flow: $15,600
Result: A strong return—this duplex offers a higher yield compared to the single-family home.
Related: How to Analyze a Rental Property
Summary Table
Now that we've covered two scenarios, here’s a quick side-by-side summary to compare the numbers:
Metric | Example 1 (Single-Family) | Example 2 (Duplex) |
Annual Pre-Tax Cash Flow | $7,200 | $15,600 |
Total Cash Invested | $90,000 | $95,000 |
Cash-on-Cash Return | 8% | 16.4% |
Try It Yourself – Use our Cash-on-Cash Return Calculator:
Pro Tip: Want to go deeper on return calculations? Check out this definitive guide on real estate returns for a full breakdown of methods beyond cash-on-cash.
Why Cash-on-Cash Return Matters
Focuses on actual cash flow (not theoretical value)
Helps compare similar investment opportunities
Ideal for leveraged real estate deals
Easy to explain to partners, lenders, or passive investors
Pro Tip: Want to understand why cash flow often beats appreciation? Check out this interview with Paul Shively on picking the right investment strategy from FortuneBuilders.
Limitations to Keep in Mind
Ignores equity growth through appreciation or mortgage paydown
Pre-tax metric — doesn't consider your actual take-home income
Doesn't factor in resale value or long-term gains
When to Use Cash-on-Cash Return
Rental property analysis before purchase
Deciding between multiple deals
Evaluating performance year-over-year
Communicating ROI to investors or partners
Final Thoughts
Cash-on-cash return is a must-know metric for real estate investors. It provides a clear view of how much income your invested capital generates annually. By combining formulas with real examples, you can better gauge opportunities and make data-driven decisions. Keep in mind it’s just one piece of the puzzle — combine it with other metrics like ROI, cap rate, and IRR for full clarity.
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About the Author Ricardo Reis - Learn About Ricardo
Entrepreneur, Inventor, Investor, Military Veteran. Ricardo is a member of G3 Management & Investments a division of Great Lakes Real Estate and a real estate professional. He is a successful real estate investor and licensed professional with over 15 years of experience.
DISCLAIMER - NOT INVESTMENT, FINANCIAL, LEGAL, TAX, OR OTHER ADVICE: This blog is for informational purposes only and not a substitute for professional advice. We do not offer advice, solicitation, recommendations, or endorsements. You are solely responsible for evaluating the information's merits and risks. Always consult a qualified professional before acting.