Cash-on-Cash Return Defined

Real estate investors use cash-on-cash return (CoC) to measure how efficiently invested cash generates income. It represents the annual pre-tax cash flow divided by the total cash invested in a property. Because it focuses only on actual money you put in, CoC provides a quick gauge of potential profitability before considering appreciation or tax effects.

The Formula

Expressed mathematically, cash-on-cash return is:

where $\mathrm{CF}$ is the annual pre-tax cash flow and $\mathrm{CI}$ is the total cash invested, including down payment, closing costs, and initial repairs.

Why Investors Care

Cash-on-cash return highlights how much money your property puts in your pocket relative to your initial outlay. Traditional metrics like ROI may incorporate appreciation and loan paydown, which can obscure short-term performance. CoC focuses strictly on cash flow, making it valuable for investors seeking passive income or comparing properties with different financing structures.

Example Calculation

Suppose you invest $40,000 in a rental property, including the down payment and closing costs. After accounting for rent, mortgage payments, taxes, and maintenance, your annual pre-tax cash flow is $4,000. Plugging these numbers into the formula yields a cash-on-cash return of 10%.

Benchmark Values

CoC Return	Typical Interpretation
Below 5%	Weak cash flow
5% - 10%	Moderate performance
Above 10%	Strong cash-generating property

Limitations

CoC does not account for appreciation, depreciation, or taxes, nor does it consider changes in property value over time. A property might show a low CoC but appreciate rapidly, yielding significant long-term gains. Conversely, a high CoC property could stagnate in value. Use CoC alongside other metrics like internal rate of return (IRR) and net operating income (NOI) for a complete picture.

Using the Calculator

Enter your annual pre-tax cash flow and the total cash you invested. The calculator returns the percentage yield. Experiment with different scenarios—such as a larger down payment or higher rents—to see how CoC changes. This helps you evaluate opportunities and set investment goals.

Conclusion

Cash-on-cash return is a straightforward way to assess real estate deals from a cash flow perspective. It tells you how hard your invested dollars are working each year. Combine this metric with others to make informed property investment choices.