How to Calculate Cash-on-Cash Return

The formula

Cash-on-cash return equals annual pre-tax cash flow divided by total cash invested. Cash flow is NOI minus debt service; cash invested is your down payment plus closing costs, land transfer tax and any upfront capital work.

Everything hinges on getting the denominator right. Investors who count only the down payment overstate their returns.

A worked example

On a $725,000 purchase with 20% down, you invest $145,000 plus roughly $19,000 in closing costs and land transfer tax, so $164,000 of cash.

If NOI is $42,780 and annual debt service is $37,680, cash flow is $5,100. Cash-on-cash return is $5,100 ÷ $164,000, or about 3.1%.

How leverage moves the number

When your mortgage rate is below the cap rate, borrowing lifts cash-on-cash above the unleveraged yield. When it is above, more leverage lowers cash-on-cash and raises risk at the same time.

That is why cash-on-cash should never be read alone. Pair it with DSCR to see the cushion and with IRR to see the multi-year picture.

Frequently asked