How cash-on-cash return is calculated
Start with a year of cash flow. Take the monthly rent, knock off a vacancy allowance, subtract the mortgage principal and interest, subtract taxes and insurance, subtract a maintenance allowance, and multiply what is left by twelve.
Then divide that yearly cash flow by every dollar you put in: down payment, closing costs, and whatever the rehab cost before it was rentable. The result is directly comparable to anywhere else you could have parked that money.
Vacancy and maintenance are the two inputs people leave at zero to make a deal look good. A property is not vacant every year and the water heater does not fail every year, but across the years you hold it both happen, and a return calculated without them is not a return.
- Monthly cash flow = rent minus vacancy, minus mortgage principal and interest, minus taxes and insurance, minus maintenance
- Yearly cash flow = monthly cash flow times twelve
- Cash-on-cash return = yearly cash flow divided by total cash invested
Why this is the number to compare against everything else
Cap rate compares buildings. Cash-on-cash compares choices. The same down payment could have gone into a different property, a different city, or somewhere that is not real estate at all, and this is the only one of the two numbers that lets you make that comparison honestly.
It also exposes what leverage is doing. A bigger loan means less cash in, which pushes the percentage up, while also making the deal thinner and more fragile if rent drops or a payment resets. Run the same property at two different down payments and the trade becomes visible instead of theoretical.
What it deliberately leaves out
It is a cash number, so it ignores three real sources of return: the principal your resident pays down each month, appreciation, and the tax treatment of depreciation. A deal that looks flat here can still be building wealth through all three.
That is a reason to read it alongside other numbers, not a reason to ignore it. Cash flow is what pays for a broken furnace in February. Equity is not available that week.
A worked example
A rental bought with $48,000 of cash in total, renting for $1,900 a month, with a $980 mortgage payment, $320 a month in taxes and insurance, and 8% allowances for both vacancy and maintenance.
- Rent after an 8% vacancy allowance
- $1,748
- Mortgage principal and interest
- minus $980
- Taxes and insurance
- minus $320
- Maintenance allowance (8% of rent)
- minus $152
- Monthly cash flow
- $296
- Yearly cash flow
- $3,552
- Total cash invested
- $48,000
Set vacancy and maintenance to zero and the same deal reads 15.00%. That gap is the entire difference between a plan and a pitch.
Common questions
What counts as cash invested?
Every dollar that left your account to get the property earning: down payment, closing costs, lender fees, and the cost of any work needed before it could be rented. Not the mortgage amount, because that money was never yours.
Should the mortgage payment include escrow?
Use principal and interest only in the mortgage field, and enter taxes and insurance separately, which is what this calculator asks for. Entering a full escrowed payment and then also filling the taxes field double-counts them and makes the deal look worse than it is.
What vacancy and maintenance percentages should I use?
Your own, if you have them. A property you already own has a real vacancy history and a real repair history, and those beat any rule of thumb. For one you have not bought yet, ask a local manager what turnover looks like in that submarket rather than defaulting to a figure you read somewhere.
Does cash-on-cash include paying down the loan?
No. Principal paydown is real return but it is not cash in your hand this year, so it sits outside this number. The same goes for appreciation and depreciation. Cash-on-cash answers one narrow question honestly rather than several questions vaguely.
These calculators are educational and are not legal, tax, lending, or accounting advice. Rules vary by state and by city, and your lease governs your own properties. Check your own requirements before relying on any number here.