When Sofia bought her first rental property, she was thrilled. The idea of collecting rent every month felt like passive income at its finest. But after mortgage payments, repairs, and surprise vacancies, she realized she wasn’t sure if her “investment” was actually profitable. That’s when her mentor introduced her to the concept of cash-on-cash return—a simple way to measure whether the money she invested was working hard enough.
What Is Cash-on-Cash Return?
Cash-on-cash return (CoC) is a real estate metric that calculates the annual cash income you earn compared to the actual cash you invested. Unlike ROI, which can include property appreciation, CoC focuses only on current cash flow. As Investopedia notes, it’s especially useful for investors who finance purchases with debt.
Formula:
Cash-on-Cash Return = (Annual Pre-Tax Cash Flow ÷ Total Cash Invested) × 100
Breaking Down the Numbers
- Annual Pre-Tax Cash Flow: Rental income minus all operating expenses and mortgage payments (before taxes).
- Total Cash Invested: Down payment, closing costs, and any upfront repairs or renovations.
Case Study: Sofia’s Duplex
Sofia bought a duplex for $250,000 with the following setup:
- Down payment: $50,000
- Closing + renovation costs: $10,000
- Total cash invested: $60,000
- Monthly rent: $2,500 total
- Monthly expenses (mortgage, insurance, maintenance): $2,000
That left her with $500 monthly cash flow, or $6,000 per year.
Cash-on-Cash Return = $6,000 ÷ $60,000 = 10%
For Sofia, this made the duplex a solid investment, since many investors target 8–12% CoC returns.
Why It Matters
Cash-on-cash return helps investors compare deals quickly. Two properties might both look profitable, but one could tie up more cash for less return. CoC reveals efficiency—how hard each dollar invested is working.
Limitations of CoC
- It ignores appreciation, tax benefits, and long-term equity build-up.
- It’s highly sensitive to financing terms—different loans change outcomes dramatically.
- It’s a snapshot metric: great for the first year, but less useful as properties evolve.
FAQs
What’s a good cash-on-cash return?
Many investors aim for 8–12%, but the “good” number depends on location, risk tolerance, and portfolio strategy.
Is CoC the same as ROI?
No. ROI includes appreciation and total return on investment, while CoC focuses only on immediate cash income vs cash invested.
Should I only use CoC when evaluating rentals?
It’s best for comparing leveraged deals or when short-term cash flow is your priority. Use it alongside other metrics like cap rate and ROI.
Does higher CoC always mean a better deal?
Not necessarily. A high CoC with high risk (unstable tenants, bad location) could still be a poor long-term choice.
Take Action This Week
If you’re considering a property, calculate cash-on-cash return before buying. Add up all upfront costs, estimate realistic rental cash flow, and run the math. If the return doesn’t meet your target, walk away. The right deal should fit your numbers, not the other way around.
Final Takeaway
Sofia learned that real estate success isn’t just about owning property—it’s about ensuring each dollar invested delivers meaningful returns. Cash-on-cash return gave her the clarity to distinguish a true investment from a costly hobby. Mastering this metric can turn confusion into confidence in your real estate journey.
