Cash-on-Cash Return: Formula, Example, and What Counts as Good

Cash-on-cash return is a rental's annual cash flow before income taxes divided by the total cash you put into buying it. A property that leaves $2,105 a year after its mortgage payments, on $60,000 of down payment, closing costs, and repairs, has a 3.5% cash-on-cash return. There is no official benchmark for a good one, so compare it with what the same cash earns without tenants or repairs, such as the 4.41% yield on a 1-year Treasury on October 22, 2026.

The formula and what goes into each part

Cash-on-cash return = annual pre-tax cash flow / total cash invested.

Annual pre-tax cash flow is a full year of rent at full occupancy, minus a vacancy allowance, operating expenses, and the whole mortgage payment, principal and interest. How to calculate rental property cash flow builds that number line by line. The principal part of each payment counts as cash going out, even though it lowers your loan balance.

Total cash invested is every dollar you put in to buy the property and get it rented:

• The down payment.
• Closing costs, including lender fees, any points (upfront fees paid to lower the rate), title charges, and prepaid taxes and insurance.
• Repairs or upgrades made before the first tenant moves in.
• Minus any credits the seller gave you at closing.

If your lender gives you a Loan Estimate or Closing Disclosure, its Cash to Close figure combines the down payment and closing costs but subtracts the earnest money deposit you already paid and any seller credits, so add the deposit back. Lenders do not have to use those federal forms for a rental you will not live in, because the truth-in-lending rules treat a loan to buy non-owner-occupied rental property as business credit. In that case, ask for an itemized estimate of fees and cash due at closing.

Worked example: one property, four ways to buy it

A single-family rental costs $200,000 and produces $15,000 a year of net operating income (NOI), the rent collected minus operating expenses before any loan payment. That is a 7.5% cap rate, NOI divided by price. Closing costs are $6,000 with a loan or $3,000 for a cash purchase, and the buyer spends $4,000 on repairs before renting it out.

For the first row: $50,000 down plus $6,000 of closing costs plus $4,000 of repairs is $60,000 invested. The $150,000 loan costs $1,074.62 a month, or $12,895 a year. Cash flow is $15,000 minus $12,895, or $2,105, and $2,105 divided by $60,000 is 3.5%.

The 7.75% rate is an assumption for this example. Freddie Mac's weekly survey put the average 30-year fixed rate at 7.32% on October 22, 2026, but that average covers owner-occupied homes bought with 20% down. Fannie Mae adds a pricing charge, called a loan-level price adjustment, to every mortgage on an investment property, on top of its other pricing, so expect a quote above the survey average and use the rate a lender actually offers you.

How the down payment and interest rate change the result

In this example, borrowing lowers the return, and borrowing more lowers it further. The reason is the loan constant, a loan's yearly payments as a percentage of the amount borrowed: 8.6% for a 30-year loan at 7.75%. Each $100 borrowed costs $8.60 a year in payments, while each $100 of the property's full cost ($210,000 of price, closing costs, and repairs) earns about $7.14 of NOI. The more you borrow, the more of that gap comes out of your cash flow.

• Down payment. When the loan constant is above the property's return on its full cost, a larger down payment raises cash-on-cash return and a smaller one lowers it, as the 20% row shows. When the loan constant is below that return, putting less down raises the return, though it also leaves less room in the budget for a vacancy or a large repair. For this property, the rate would have to fall below about 5.9% before borrowing raised the return.
• Interest rate. One percentage point on a $150,000, 30-year loan changes the payments by about $1,220 a year (7.75% versus 6.75% in the table), which moves this property's return by 2 points.
• Points. Paying points cuts the payment but adds to cash invested. If one point ($1,500) bought a rate of 7.5% instead of 7.75%, payments would fall by about $310 a year and the return would rise from 3.5% to 3.9%.
• Refinancing later. A cash-out refinance returns some of your cash, which shrinks the cash invested and can make the return look very large, though the bigger loan also raises the payments. The BRRRR strategy is built on that step.

How financial leverage works in real estate covers when borrowing helps and the risks it adds. Because the cap rate leaves the loan out, it stays at 7.5% for this property in every row of the table.

What counts as a good cash-on-cash return

Yields on lower-effort uses of the same cash, before income tax:

A Treasury held to maturity pays its stated yield with no tenants or repairs. A listed REIT (real estate investment trust) is a company that owns income-producing real estate and whose shares trade on a stock exchange, so it pays dividends without landlord work, though its share price can fall. A rental's cash-on-cash return has to cover what only the rental carries: months with no rent, a single repair bill larger than a year's cash flow ($2,105 in the first row), and the cost and time of selling if you need the money back. If you want 3 percentage points over the 1-year Treasury for those risks and your time, your floor in October 2026 is about 7.4%. By that test, the 25%-down purchase above falls short at 3.5%, and even the all-cash purchase, at 7.2%, just misses.

Cash-on-cash return leaves out principal paydown and appreciation. Analyzing rental property ROI adds them to cash flow and shows how the result changes if the property does not gain value. For the full buying process around this number, see how to buy your first rental property.