Cash-on-cash return measures your annual pre-tax cash flow relative to the cash you actually invested. Formula: (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100. If you invest $80K and receive $8,000/year in cash flow, your cash-on-cash return is 10%. It's the most practical metric for investors because it accounts for your actual financing.
Formula and Example
Cash-on-cash return = (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100. Your total cash invested includes the down payment, closing costs, and any immediate repairs. Your annual pre-tax cash flow is the rent minus all expenses (mortgage, taxes, insurance, management, maintenance, vacancy) before income taxes.
Example: You buy a $300K duplex with 25% down ($75,000). Closing costs add $5,000. Total cash invested: $80,000. The property generates $30,000/year in rent. After all expenses including the mortgage payment, your annual pre-tax cash flow is $8,000. Your cash-on-cash return is 10%.
Why It Beats Cap Rate for Investors
Cap rate ignores how you finance the deal. Cash-on-cash return tells you what you are actually earning on the money you invested. Two investors could buy the same property and get different cash-on-cash returns depending on their down payment and loan terms. That makes cash-on-cash return more practical for evaluating real-world investments.
How to Calculate It Step by Step
Step 1: Calculate your total cash invested (down payment + closing costs + repairs). Step 2: Calculate annual rental income. Step 3: Subtract all annual expenses including the mortgage payment. Step 4: Divide the result by your total cash invested. Step 5: Multiply by 100.
Target Returns (8-12% Is Good for Residential)
For residential rental properties in San Antonio, a cash-on-cash return of 8-12% is considered good. Returns below 6% may not be worth the effort and risk. Returns above 15% are exceptional but may come with higher risk or require significant value-add work.
How Financing Affects It
The more leverage you use, the higher your cash-on-cash return can be, but the higher your risk. A 25% down payment might give you a 10% cash-on-cash return, while 20% down on the same property might give you 12%. Lower rates also improve cash-on-cash return because your mortgage payment is lower.
Using It to Compare Deals
Cash-on-cash return is the best metric for comparing different investment opportunities because it accounts for your specific financing scenario. Use it alongside cap rate to get the full picture of a property's potential.
