Rental Property Cash on Cash Return Calculator
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Understanding Cash on Cash Return in Real Estate
In the world of real estate investing, not all metrics are created equal. While Cap Rate measures the property's potential return assuming an all-cash purchase, the Cash on Cash (CoC) Return is arguably the most critical metric for investors utilizing leverage (mortgages). It specifically measures the annual return you made on the actual cash you invested, rather than the total purchase price of the home.
How is Cash on Cash Return Calculated?
The formula for Cash on Cash return is relatively straightforward but requires accurate inputs regarding both your initial capital layout and ongoing operational cash flow.
Cash on Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) × 100%
To use this calculator effectively, you need to understand the two main components:
- Annual Cash Flow: This is your gross annual rent minus all operating expenses (taxes, insurance, repairs, vacancy) and minus your annual mortgage debt service.
- Total Cash Invested: This is the sum of your down payment, closing costs, and any immediate renovation or rehab costs required to get the property rented.
Example Calculation
Imagine you purchase a rental property for $200,000.
- You put 20% down ($40,000).
- Closing costs are $5,000.
- Rehab costs are $5,000.
- Total Cash Invested = $50,000.
After paying the mortgage and all expenses, the property generates $250 per month in pure profit (cash flow).
- Annual Cash Flow = $250 × 12 = $3,000.
- CoC Return = ($3,000 / $50,000) × 100 = 6.00%.
What is a Good Cash on Cash Return?
While "good" is subjective and depends on the economy and local market, many investors target a Cash on Cash return between 8% and 12%. Returns in this range generally outperform the stock market average while providing the added benefits of real estate ownership, such as tax depreciation, principal paydown on the loan, and potential property appreciation.
Use the calculator above to run scenarios on potential deals. Adjusting the rent slightly or negotiating a lower purchase price can drastically change your CoC return percentage.