What is Cash-on-Cash Return?
Cash-on-cash return (CoC) measures the annual pre-tax cash flow relative to the total cash you invested in a property. Unlike cap rate, which ignores financing, CoC accounts for your mortgage payments and shows you the actual return on your out-of-pocket investment.
This metric is particularly valuable because it reflects the power of leverage—using borrowed money to amplify returns on your own capital.
The Cash-on-Cash Formula
Where Annual Cash Flow = NOI - Annual Debt Service
Cap Rate vs. Cash-on-Cash Return
These metrics answer different questions:
Cap Rate
"How does this property perform?"
- • Ignores financing
- • Compares property to property
- • Same result for all buyers
- • Based on purchase price
Cash-on-Cash Return
"What's my return on cash invested?"
- • Includes debt service
- • Compares to other uses of capital
- • Varies by financing terms
- • Based on cash invested
Step-by-Step Calculation
Step 1: Calculate Net Operating Income (NOI)
Start with gross rental income and subtract all operating expenses (property taxes, insurance, maintenance, management, vacancy).
Step 2: Calculate Annual Debt Service
Determine your annual mortgage payments (principal + interest). This is typically your monthly payment × 12.
Step 3: Calculate Annual Cash Flow
Subtract annual debt service from NOI to get your actual cash flow.
Step 4: Total Up Cash Invested
Cash Investment Components
- •Down payment (typically 20-25% of purchase price)
- •Closing costs (2-5% of purchase price)
- •Rehab/renovation costs (if any)
- •Initial reserves (3-6 months expenses)
Example Calculation
Purchase Price: $400,000
Down Payment (25%): $100,000
Closing Costs: $8,000
Initial Reserves: $5,000
Total Cash Invested: $113,000
Annual NOI: $28,800
Annual Debt Service: $19,200
Annual Cash Flow: $9,600
CoC Return = $9,600 ÷ $113,000 = 8.5%
The Power of Leverage
One of the most powerful aspects of real estate investing is leverage—using borrowed money to amplify returns. Compare these scenarios for the same $400,000 property with 7.2% cap rate:
| Scenario | Cash Invested | Cash Flow | CoC Return |
|---|---|---|---|
| All Cash (0% LTV) | $400,000 | $28,800 | 7.2% |
| 25% Down (75% LTV) | $113,000 | $9,600 | 8.5% |
| 20% Down (80% LTV) | $93,000 | $7,200 | 7.7% |
Leverage Cuts Both Ways
Leverage amplifies returns when the property performs well, but it also amplifies losses during vacancies or market downturns. Higher leverage = higher risk.
What's a Good Cash-on-Cash Return?
Target returns depend on your investment goals and risk tolerance:
Conservative: 6-8%
Lower risk properties in stable markets. Focus on appreciation over cash flow.
Moderate: 8-12%
Sweet spot for most investors. Solid cash flow with reasonable risk.
Aggressive: 12%+
Higher risk properties, value-add opportunities, or emerging markets.
Always compare CoC return to alternative investments. If you can get 5% in a money market account with zero effort, your real estate investment should justify the additional work and risk.
See Cash-on-Cash Returns Instantly
Estara AI calculates cash-on-cash returns for every property using current mortgage rates and realistic expense assumptions.
Get Your Free Snapshot