Cash-on-cash return

Example

An investor buys a $300,000 house with $60,000 down and $9,000 in closing costs: $69,000 of cash in. NOI is $19,800 and the mortgage payments total $15,000 a year, leaving $4,800 of cash flow. Cash-on-cash return is $4,800 ÷ $69,000 = 7.0%. Bought with cash, the same house would return its cap rate, $19,800 ÷ $300,000 = 6.6%.

In a deal summary it looks like…

Projected first-year cash-on-cash return: 7.0%, assuming 20% down, closing costs of $9,000 and current rents.

Good to know

The part of each mortgage payment that pays down the loan is not counted as cash flow, and neither is appreciation, so cash-on-cash understates a good deal’s total return. It also says nothing about risk: a higher rate on a bigger loan can look better on paper and be worse in a bad year. Compare it only with deals financed the same way.