Cash-on-cash return answers one question: for every dollar you handed over, how many cents came back this year? It’s the closest thing a rental has to a savings-account rate, which is why it’s the number people compare across deals.
What is the cash-on-cash return formula?
A year of cash flow, divided by the cash you put in.
Cash flow is what’s left after the mortgage and every running cost. Cash invested is the money that actually left your accounts to get the house rented: the down payment, the closing costs, and any work done before the first tenant. Not the price, and not the loan.
Both halves have to cover the same year, and both have to be after-the-fact numbers rather than the top-line rent. Rent minus the mortgage is not cash flow, and that’s the mistake that makes a 14% return turn into 4% in the second year.
A $250,000 rental, three ways to buy it
Take one house at $250,000 renting for $2,750 a month, with $3,000 a year of property tax and $1,400 of insurance, 5% of rent held back for empty months, 5% for maintenance, 5% for the big replacements and 8% for a manager. The loan is a 30-year mortgage at 7%, and closing costs are 3% of the price.
Nothing about the house changes in the three columns below. Only the way it’s paid for does.
| 20% down | 25% down | 20% down, $10,000 of work | |
|---|---|---|---|
| Down payment | $50,000 | $62,500 | $50,000 |
| Closing costs (3% of the price) | $7,500 | $7,500 | $7,500 |
| Work before the first tenant | – | – | $10,000 |
| Cash invested | $57,500 | $70,000 | $67,500 |
These are example figures, not a forecast for any market.
Each of those piles earns a different amount, because a bigger down payment means a smaller loan and a smaller payment.
| 20% down | 25% down | 20% down, $10,000 of work | |
|---|---|---|---|
| Cash flow a year | $5,043 | $6,041 | $5,043 |
| Cash invested | $57,500 | $70,000 | $67,500 |
| Cash-on-cash return | 8.8% | 8.6% | 7.5% |
Two things in that table are worth sitting with.
Putting more down raised the cash flow by $998 a year and lowered the return. The extra $12,500 of down payment only earned 8.0% on itself, which is less than the 8.8% the first $57,500 was already earning, so the average fell. More money and a lower return are not a contradiction.
And the third column earns exactly what the first one does. The $10,000 of paint and flooring didn’t raise the rent in this example, so cash flow didn’t move, but the denominator grew by $10,000. The return fell from 8.8% to 7.5% on work that changed nothing about the income. Money spent before the first tenant counts against your return just as hard as the down payment does.
What does cash-on-cash return leave out?
Most of what you earn. It counts cash flow and nothing else, so three of the four ways a rental pays you are missing:
- The loan getting smaller. Every payment buys you a slice of the house. In the first year on the $200,000 loan here that’s about $2,000 of principal, and cash-on-cash ignores all of it.
- Any change in value. A house worth more next year shows up nowhere in this number.
- The tax treatment. Depreciation can shelter some of the cash flow, which is a real benefit this ratio doesn’t see. Your own facts decide the outcome there, so ask a tax professional.
It’s also a snapshot of one year. Rent usually rises faster than a fixed mortgage payment, so year five on the same house tends to look better than year one, and nothing in the ratio tells you that. For the return across a whole hold, including the loan paydown and the sale, the measure is IRR: see what counts as a good IRR.
How is it different from cap rate?
Cap rate ignores the loan; cash-on-cash is mostly about the loan. Cap rate divides net operating income by the price, which is the same for a cash buyer and a borrower. Cash-on-cash divides what’s left after the mortgage by what you personally put in, so changing the down payment or the interest rate moves it and leaves the cap rate exactly where it was. Cap rate against cash-on-cash return sets them side by side.
What makes the number wrong?
Three inputs, usually, and they are all on the cash flow side.
The vacancy allowance. The example above holds back 5% of rent, which is roughly two and a half weeks a year. Nationally there was more slack than that in 2026: the Census Bureau’s Housing Vacancy Survey put the rental vacancy rate at “7.3 percent for rental housing” in the second quarter of 2026, not statistically different from 7.0 percent a year earlier. Your street is not the nation, but 5% is an assumption, not a fact.
The reserve for big replacements. A roof and a furnace don’t bill you monthly, so a year without one looks better than the house really did. Leaving that line out is the single easiest way to publish a return you won’t repeat, and the roof will still arrive.
Management. If you plan to self-manage, the 8% is still a cost you’re paying yourself in hours. Leaving it at zero makes your return and a stranger’s return incomparable.
How do you work out your own?
Put the house in the rental calculator and read two rows: Cash invested, and Cash-on-cash return. The calculator builds Cash invested from the down payment, the closing costs and the rehab budget, which is why typing a rehab figure drops the return even when the rent stays put.
Then compare it against something. A return only means something next to the alternatives: another house, a lower down payment on this one, or leaving the money where it is. What a rental should clear each month covers the dollar figure behind the percentage, and the full cash flow breakdown shows every line that feeds it.