Cash on cash return calculator

A $400,000 rental bought with 25% down at 7% invests $130,000 of cash once closing costs, rehab and reserves are in. It earns $26,099 of net operating income and pays $23,951 of debt service, leaving $2,148, a cash on cash return of 1.65%. Counted as many listings count it, with rent minus taxes, insurance and the loan, the same property shows 9.3%. All cash, it would return 6.07%. By year ten, with rent growing 3% a year, the cash on cash return is 7.77%, and the ten-year IRR with a sale is 9.82%.

The calculator builds total cash invested line by line, computes cash flow after vacancy and reserves, and then goes past year one: a year-by-year projection, a leverage sweep, the exit with equity multiple and IRR, and the highest price that delivers your target return.

Who reaches for this

You enter the purchase and the loan, the rent and operating costs, and a few assumptions about the years ahead. The calculator builds cash invested from its parts and net operating income from rent after vacancy, reserves and fixed costs. It subtracts the loan payment for the year-one cash flow, and divides. Then it repeats the arithmetic for each year, with rent and costs growing and the loan balance falling.

Cash on cash is a levered, pre-tax yield. The cap rate calculator covers the unlevered version and the property’s value, and the DSCR calculator covers whether the income can carry the loan. This page is about what the deal pays you for the cash you put into it, and how to read that number honestly.

The formula is short, and everything depends on the two inputs. The numerator is cash that reaches you in a year: what the property collects, less what it costs to run, less the loan payment. The denominator is cash that left you to make that possible.

Take a $400,000 purchase with 25% down. The loan is $300,000. At 7% over 30 years, the payment is $1,995.91 a month, or $23,951 a year. That is a mortgage constant of 7.98%, meaning each dollar borrowed costs 7.98 cents a year in debt service, a figure higher than the 7% rate because it includes principal. The property’s net operating income is $26,099, so cash flow is $2,148. Against $130,000 of cash invested, the return is 1.65%.

It is called a pre-tax measure because it ignores income tax. It is also a snapshot: the number for a single year, at the starting rent and costs. Later sections show what changes as the years pass, and what the measure leaves out.

The most common error in a cash on cash calculation is the denominator. Cash invested is not the down payment. It is every dollar you paid to get the property earning.

In the example, the total is $100,000 + $12,000 + $8,000 + $10,000 = $130,000. Divide the $2,148 of cash flow by the down payment alone and it reads 2.15%. That is 30% higher than the true 1.65%, and it comes purely from leaving out $30,000 of real cash. It sounds like a small mistake and it changes what a deal looks like.

Should reserves count?

Cash you set aside is not spent, so some investors leave it out. The safer view counts it, because it is cash you cannot use elsewhere and cash the deal needed in order to work. The choice moves the return by a modest amount, and the important thing is to state it and apply it to every deal you compare. The calculator counts reserves in the denominator.

The numerator has its own trap. Cash flow is net operating income minus debt service, and net operating income is only honest if it includes the costs that do not arrive on a monthly bill.

The example rents for $3,600 a month, $43,200 a year. Vacancy and credit loss at 6% remove $2,592, leaving $40,608 collected. Then come costs that scale with rent: maintenance at 5%, management at 8% and a capital reserve at 5%, together 18% or $7,309. Property tax of $4,800, insurance of $1,800 and $600 of other costs are fixed at $7,200. Net operating income is $40,608 − $7,309 − $7,200 = $26,099, a 6.52% cap rate on the price.

The advertised version shows $12,049 a year and 9.3%. It leaves out vacancy, management, maintenance and the capital reserve, $9,901 a year between them. Those costs are real whether or not anyone lists them. A property does not stay full, a roof does not last forever, and if you do not pay a manager you are paying with your own time. Counting them is what turns a listing into an underwriting.

Capital reserves are not optional

Maintenance is the small repairs, and capital expenditure is the big ones: a roof, a furnace, a water heater, flooring. They arrive irregularly, so an owner who counts only the year they happen to fall in overstates the average. A reserve of a few percent of rent smooths them into the cash flow. The right percentage depends on the age and condition of the property, and the example’s 5% is an illustration.

Stress the number

A thin return has little room for error, so test it. Raise vacancy from 6% to 10% and the example’s net operating income falls to $24,682, cash flow to $731, and the return to 0.56%. Raise the interest rate to 8%, on a loan that resets or a refinance, and it turns negative. A deal that survives a bad year at the vacancy and the rate you fear is a deal you can hold, and one that only works at the best case is a deal that needs luck.

Financing changes the return in a way that surprises many first-time buyers. Compare two numbers. The cap rate, 6.52% here, is what the property earns as a share of its price. The mortgage constant, 7.98%, is what the loan costs as a share of the amount borrowed. When the cap rate is below the mortgage constant, each borrowed dollar earns less than it costs, and borrowing lowers your return. This is negative leverage. The cap rate page covers the theory in depth, and the sweep shows it in numbers.

Every step toward more debt lowers the return, and at 10% down the property loses money each year. All cash returns 6.07%, which is the property’s own yield after costs, on the whole $430,000 you have put in. The lesson is not to avoid loans. It is that leverage amplifies the relationship between what a property earns and what money costs, and at the example’s rate and price that relationship is unfavorable.

The rate is the lever

Rates move the result quickly. At 5%, the mortgage constant is 6.44%, the cap rate is above it, and the year-one return is 5.21%. At 6% it is 3.47%, at 7% 1.65%, and at 8% it turns negative at −0.24%. Two points of rate move the return by about 3.6 points. That is why the same property that returned well in a low-rate market can look poor in a high-rate one, with no change in the rent or the price.

The sweep applies your rate to every loan size. In practice lenders quote different rates and terms at different down payments, so treat it as an illustration of the direction. A lender’s view of the same loan, the coverage of debt service by income, is on the DSCR calculator.

Year one is the low point for many deals. The loan payment is fixed for the term, while rent and operating costs rise with time. Suppose rent grows 3% a year and fixed costs 3%. Net operating income rises from $26,099 to $34,053 by year ten, debt service stays at $23,951, and cash flow grows from $2,148 to $10,102.

Cash on cash rises from 1.65% to 7.77%, nearly five times, with no change in the property. The last column adds principal paid, the part of the payment that reduces the loan and builds equity. It is not cash in your pocket, so cash on cash ignores it, but it is a real gain you collect when you sell or refinance. On that basis year one is 4.0% and year ten 12.2%.

Two cautions. Growth is an assumption, and rents in a weak market can stall while taxes and insurance keep rising. And the projection assumes no major capital spending beyond the reserve. A single year with a large repair can wipe out the cash flow for that year. Test lower growth and higher costs before believing the later years.

Compare the plan with what happens

Once you own the property, the same arithmetic becomes a report card. Each year, compute actual cash flow from the books, divide by the cash you invested, and put it next to the projection. If the actual return runs below the plan, look first at vacancy, repairs and management, where projections are usually optimistic, and then at rent growth. Adjust the assumptions for the next deal from what you learn.

Cash on cash is a yield, and a yield is not a total return. To see the whole result you have to add what happens at the end: the sale. With 3% appreciation a year, the $400,000 property is worth $537,567 after ten years. Selling costs of 6% take $32,254, and the loan balance is $257,437, so the net proceeds are $247,875.

Add the $59,682 of cash flow collected over the ten years, and the total cash back is $307,557 on the $130,000 invested, an equity multiple of 2.37 times. The internal rate of return, which annualizes the whole stream of cash flows and accounts for when they arrive, is 9.82%. The first-year cash on cash return was 1.65% and the annual return over the hold is 9.82%, because most of the gain comes from principal paydown and appreciation and not from the cash flow in any one year.

What drives the exit result

The exit numbers depend heavily on the appreciation you assume. At 3% a year the property gains $137,567 over ten years, more than the cash flow. At 0% the sale price is the purchase price, the selling costs eat $24,000, and the return falls sharply. Treat appreciation as a bonus and not as the plan. A deal that only works with appreciation is a bet on the market.

Holding period matters as well. Selling in the first few years usually loses money after selling costs, because the costs are large relative to the equity built. That is the reason cash on cash on its own is misleading for short holds, and IRR and equity multiple are better for judging a whole investment.

The calculation runs backward too. Given the rent, the costs, the down payment percentage and the rate, what is the highest price that still returns your target? For an 8% first-year return, the example needs a price of $299,701, which is $100,299 below the $400,000 asking price. Every dollar of price adds cash to the denominator and debt to the numerator’s cost, so the return falls steadily as the price rises.

Use the price as a tool for an offer. It says what the property is worth to you at your required return, given today’s financing. If the seller will not come down, the alternatives are a higher rent, lower costs, more cash and less debt, or a different property. The cap rate calculator shows the price a given cap rate implies, which is the unlevered version of the same question.

In a buy, rehab, rent, refinance, repeat strategy, you buy below market value, renovate, rent the property out, and then refinance at the higher appraised value to pull your cash out. The cash you get back reduces the cash still invested, which lifts the cash on cash return.

Suppose the example investor refinances and takes back $60,000. The cash left in the deal falls from $130,000 to $70,000, and the $2,148 of cash flow becomes a 3.07% return instead of 1.65%. In practice the new, larger loan raises the payment and lowers the cash flow, so the numerator changes too. Enter the new payment by changing the loan, and enter the cash out separately, to see both sides.

When the ratio breaks

If the refinance returns all of your cash, or more, the denominator is zero or negative and cash on cash is undefined or infinite. It is a good outcome and a useless number. Use other measures: the cash flow itself, the equity you hold, and the debt coverage. Some investors also track cash on cash on the original cash invested as a second view, to remember what the deal first required.

One site cites 8% to 12% as a commonly used benchmark for cash on cash return. I could not trace it to a primary source, and it is not a standard. It appears in many guides and it is a fair description of what some investors look for. Whether it suits you turns on things a benchmark cannot know.

Read cash on cash with the other measures. A 1.65% return in year one is poor as a yield, and the same deal reaches 9.82% as an IRR over ten years. Neither number is the answer alone, and whether the deal is acceptable is a judgment about the growth assumptions behind the second.

See the property’s unlevered yield with the cap rate calculator, or test whether the income can carry the loan with the DSCR calculator.