Cash-on-cash return answers a personal question: for the cash I actually pulled out of my bank, what cash comes back each year? The formula: annual pre-tax cash flow ÷ total cash invested × 100.
Counting 'cash invested' honestly
Total cash invested is everything you deployed to make the deal work: down payment, closing costs, immediate repairs, furnishings, reserves you funded at purchase. Investors who count only the down payment overstate their return.
A worked example
You invest $115,000 all-in. The property earns $34,800 rent; operating expenses are $11,800; annual mortgage payments total $15,200. Pre-tax cash flow = 34,800 − 11,800 − 15,200 = $7,800. Cash-on-cash return = 7,800 ÷ 115,000 = 6.78%.
What it deliberately ignores
- Principal paydown. Part of every mortgage payment buys equity. Total return would include it; cash-on-cash doesn't.
- Appreciation: a hope, not a cash flow.
- Taxes: pre-tax by definition.
- Time. A first-year return says nothing about year ten.
Compare leveraged and unleveraged views of the same deal with the rental ROI calculator, which shows cash-on-cash and unleveraged ROI side by side.