What is cash-on-cash return? Formula, example and what counts as good

Written by Samantha SheltonNMLS 1647301Updated October 2026

This article explains an investment metric and is general information only. It is not tax, legal or investment advice, and it is not an offer to sell or a solicitation of an offer to buy any security. Take depreciation, deduction and entity questions to a qualified tax professional, and lease, title and entity questions to a Michigan attorney. Align Lending is an independent mortgage broker that finances one- to four-unit residential investment property, not a broker-dealer, investment adviser, syndicator or property manager.

Cash-on-cash return is your annual before-tax cash flow divided by the total cash you invested, written as a percentage. Put $60,000 into a rental that produces $6,000 of cash flow after every operating expense and every mortgage payment, and your cash-on-cash return is 10%.

The power of the formula sits in the denominator. It counts only the money that actually left your account (down payment, closing costs, upfront repairs) and never the amount you borrowed. That is what separates it from a cap rate, which stops before your mortgage and therefore describes the building rather than your deal.

Learn how cash-on-cash return works: what belongs in the numerator and the denominator, a full worked example, how it compares with cap rate and total return, and the three things it quietly leaves out. Newer to this? Start with our Real Estate Investing guide or the Investing Basics hub.

Key takeaways:

• The formula is one line: Cash-on-cash return equals annual before-tax cash flow divided by total cash invested, so $9,000 of cash flow on $130,000 of cash in is a 6.9% return.
• The denominator is cash, not price: Down payment, closing costs and upfront repairs all count, while the $337,500 you borrowed does not, which is why two buyers of the same $450,000 building can post very different returns.
• Loan terms move it more than rent does: Trim annual debt service by $3,000 on that same property and the return climbs from 6.9% to 9.2%, while the cap rate sits at 8.0% in both cases.

Hypothetical example, not an offer. Actual rates, costs and payments vary.

What is cash-on-cash return?

Cash-on-cash return is the ratio of a property’s annual before-tax cash flow to the total cash the investor put into the deal, expressed as a percentage. It is a levered measure: the mortgage payment is subtracted in the numerator, and the borrowed money is excluded from the denominator, so the number answers one narrow question. What did my own dollars earn this year?

That narrowness is the point. Every other headline metric in real estate answers a different question:

• Net operating income answers what the building earns: Effective gross income minus operating expenses, measured before any loan payment.
• Cap rate answers what the building is worth: NOI divided by price, unleveraged by design, which is why it prices assets rather than deals, the subject of our guide to cap rates in real estate.
• Cash-on-cash return answers what you earned: Cash flow after debt service, divided by cash out of pocket. Change the loan and this number changes; the other two do not.

So a cash buyer and a borrower can look at the identical building, agree on the same $36,000 of NOI and the same 8.0% cap rate, and still be running two completely different investments. Cash-on-cash return is where that difference finally shows up.

How is cash-on-cash return calculated, step by step?

Two numbers and one division. Build annual before-tax cash flow, total up the cash you invested, divide the first by the second and multiply by 100.

1. Start with net operating income: Gross rent plus any other income, minus a vacancy and credit-loss allowance, minus operating expenses, property taxes, insurance, management, repairs, owner-paid utilities, HOA dues, advertising, and turnover. The national rental vacancy rate was 7.3% in the second quarter of 2026 in the U.S. Census Bureau’s Housing Vacancy Survey, so a pro forma assuming 12 paid months describes a market that does not exist. Check local conditions against rental market trends.
2. Subtract annual debt service: Twelve months of principal and interest, plus any escrowed taxes and insurance you have not already counted as operating expenses. What is left is before-tax cash flow.
3. Divide by total cash invested: Cash flow over cash in, times 100.

Here is the arithmetic on a $450,000 small multifamily bought with 25% down.

Hypothetical example, not an offer. Actual rates, costs and payments vary.

Now make it honest. Fund a $3,000 annual reserve for the roof and the furnace, capital items that never appear in NOI, and cash flow drops to $6,000 and the return to 4.6%. That 2.3-point gap between the brochure number and the funded number is the single most common overstatement in a rental pro forma.¹ The full cash-flow build, including the reserve, is in our guide to cash flow in real estate, and the screening version lives in evaluating a property’s cash flow potential.

What counts as cash invested, and what does not?

Every dollar that left your account to acquire and stabilize the property counts ($130,000 in the example above) and the $337,500 you borrowed does not. Get the denominator wrong and the percentage is fiction, so it is worth being literal about the boundary.

What belongs in the denominator:

• The down payment: The largest line, and the one that moves with your loan. At $450,000, the difference between 25% and 35% down is $45,000 of your money committed to one address.
• Closing costs you actually paid: Lender fees and points, title and settlement charges, transfer taxes, the appraisal, recording fees, and prepaid items such as the first insurance premium and the initial escrow deposit. Roughly $9,000 on this purchase. If the seller paid a cost, it is not your cash and it does not go in.
• Upfront repairs and make-ready work: The $8,500 spent before the property could be rented. This is acquisition capital, not an operating expense, and leaving it out is the fastest way to flatter a return.
• Carrying costs before the first rent check: Two months of taxes, insurance and utilities on a vacant unit is cash out the door, and it belongs in the denominator like everything else.

What stays out of the denominator:

• The financed amount: The $337,500 mortgage is not your cash. It shows up in the numerator instead, as the $27,000 of annual debt service you subtract from NOI. Counting it in both places double-punishes the deal; counting it in the denominator alone turns the metric back into an unleveraged return.
• The purchase price: Price divided into NOI is a cap rate, and that is a different measure with a different job.
• Your own labor: Sweat equity has real value, but it is not cash invested. Assign it a dollar figure and you can manufacture any return you like.
• Future capital expenditures: A roof in year five is a year-five number. It belongs in that year’s numerator as a reserve, not in your year-one denominator.

Two edge cases come up constantly. If you borrowed the down payment (from a home equity line, for example) the cash still counts in the denominator, and the payment on that second loan belongs in the numerator alongside the first mortgage. And if you later pull cash back out, the denominator shrinks and the whole percentage resets: refinancing an investment property that returns $40,000 of your original $130,000 leaves $90,000 invested, which changes the answer even though the building never moved.

How is cash-on-cash return different from cap rate and total return?

Cash-on-cash return is the only one of the three that reacts to your loan, which is exactly why a leveraged buyer should lead with it. Hold the $450,000 property, the $36,000 NOI and the $130,000 of cash invested completely still, and change nothing but the terms of the $337,500 loan:

Hypothetical example, not an offer. Actual rates, costs and payments vary.

A $250-a-month difference in debt service is worth 2.3 points of annual return on the same asset, and the cap rate never flinches. That is the practical argument for running cash-on-cash return before you sign anything: it is the metric your financing decision actually shows up in, which is why comparing lenders is underwriting work rather than paperwork. Our guide to financing a real estate investment covers how those terms are set, and investment-property pricing is genuinely its own animal. Loan-level price adjustments apply to all investment-property mortgages under the Fannie Mae Selling Guide’s occupancy rules, which also require the loan to be underwritten through Desktop Underwriter with an Approve/Eligible recommendation, with a stated exception for high LTV refinance loans. Those are conforming rules for a non-owner-occupied one- to four-unit property; an owner-occupant of a two- to four-unit building is underwritten under different rules entirely.

Here is where each metric earns its keep.

Run them in sequence rather than picking a favorite. Cap rate screens the building, cash-on-cash return grades your year, and IRR judges the whole hold once you add appreciation, principal paydown and sale proceeds. Note that ROI has no fixed definition in practice, ask anyone quoting one what went in the numerator before you compare it to anything.

How should you judge whether a cash-on-cash return is good?

There is no universally good number, though many investors work to an 8% to 12% band as a rule of thumb rather than a standard.² A return is only “good” against two comparisons: what else you could do with the same cash, and how much risk you are being paid to carry.

• Compare it to your alternatives, not a national figure: If the money would otherwise sit in a savings account, 6% on a stabilized single-family rental in a strong rental market may be a sound trade. If it would go into a diversified portfolio you never have to manage, the property has to beat that after your time.
• Higher usually means riskier, not better: A 14% projected return is often pricing weak tenant demand, deferred capital work or a thin resale market. The same instinct applies here as with cap rates, read real estate market risk before treating a high number as a bargain.
• Interrogate the assumptions before the answer: A return built on 3% vacancy in a market running near that 7.3% national rate for the second quarter of 2026, or on no capital reserve at all, is not a 12% deal. Our guide to evaluating a real estate market for investment covers the demand data behind the assumptions.
• Set your own threshold in advance: Decide the number that makes a deal worth your time before you fall in love with a listing. That discipline is most of what spotting a good real estate deal comes down to.

Past performance never predicts future results, and no projected return is a promise. A cash-on-cash return is arithmetic on assumptions, and it is only as good as the weakest one.

How does a lender’s rent math differ from your cash-on-cash math?

Your cash-on-cash return runs on the expenses you expect; a conventional lender runs on its own formula. Per Fannie Mae Selling Guide topic B3-3.8-02, dated 09/02/2026, on a purchase the lender multiplies monthly gross rent by 75% for net rental income, then subtracts the subject property’s PITIA to get adjusted net rental income, or ANRI.

• The rent has to be supported: The same topic calls for a Single-Family Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Appraisal Report (Form 1025). If market rents do not reasonably support the lease, the lender must explain the discrepancy in writing or use the lesser amount.
• A negative result works against you: With 12 months or more of rental property management experience, a positive ANRI may be used in full, and a negative ANRI must be included in the debt-to-income ratio.

The lender’s figure tests whether you can carry the loan; yours tests whether the deal is worth your cash. When they disagree, find out why before you sign. Samantha’s rule for newer investors: “I don’t love a deal that only works when nothing goes wrong.” Loan options are compared in buying a home as an investment property.

How does cash-on-cash return compare with a savings account or a REIT?

The FDIC’s national rates, published October 19, 2026, put the national deposit rate for savings accounts at 0.38% and for 12-month CDs at 1.76%. Those averages carry no vacancy, roof or tenant risk, so the distance between them and a rental’s cash-on-cash return is what you are paid for the work and the risk.

A real estate investment trust also owns real estate. Under 26 U.S.C. 857(a), the REIT tax provisions apply only if dividends paid equal at least 90 percent of REIT taxable income, figured without the dividends-paid deduction and excluding net capital gain. Per the SEC’s Investor.gov guide to REITs, REIT dividends are generally treated as ordinary income, non-traded REITs are illiquid, and their sales commissions and upfront offering fees usually total approximately 9 to 10 percent of the investment.

Hypothetical example, not an offer. Those fees work like closing costs. For example, $130,000 placed in a non-traded REIT with fees of 9 to 10 percent, the range Investor.gov gives, leaves about $117,000 to $118,300 invested. More in real estate investment trusts.

What does cash-on-cash return miss?

Three of the four ways a rental actually makes money, and one of them is usually the largest. The metric measures a single year of cash and stops, which makes it the wrong tool for judging a hold and the right tool for judging a year.

• Appreciation: Value growth produces no cash until you sell or refinance, so it never touches the numerator. On a long hold it can dwarf every dollar of cash flow the property ever produced. See real estate appreciation for why nominal and inflation-adjusted figures differ, and why neither is a forecast.
• Principal paydown: Part of that $27,000 of annual debt service is repaying your loan balance, which builds equity you cannot spend. The metric treats it as pure cost, so the more aggressively you amortize, the worse your cash-on-cash return looks and the faster you actually get richer. That tension is the subject of real estate leverage.
• Taxes, in both directions: The measure is explicitly before tax. Per IRS Publication 527, you cannot deduct the principal portion of a mortgage payment, residential rental property is depreciated over 27.5 years under the general depreciation system, land is never depreciable, and an expense that betters, restores or adapts the property must be capitalized rather than deducted. None of that shows up in a cash-on-cash return, and all of it changes what you keep.³ Start with the IRS guidance on rental income and deductible expenses, then take your own numbers to a CPA.
• Everything after year one: Rents move, taxes get reassessed, insurance reprices and a fixed mortgage payment stays fixed. A year-one percentage says nothing about year five.

The fix is not to abandon the metric. It is to stop asking it questions it was never built to answer: use cash-on-cash return to judge this year’s cash and to compare financing, and use internal rate of return or a full total-return model to judge the hold.

What do federal surveys show about rental expenses and rent growth?

According to HUD’s November 29, 2022 release of the 2021 Rental Housing Finance Survey, the median monthly operating expense per rental unit, not including debt service, was $380, and owners spent a median of $840 per rental unit a year on capital improvements; about 76 percent of property owners reported a capital improvement in 2020. These are national medians, not Michigan figures, but an expense line far below them, or a year with no capital spending, deserves a second look before it goes into the numerator.

Year two depends on whether rent keeps pace with costs. The Bureau of Labor Statistics CPI table for September 2026 reported that the rent of primary residence index rose 2.8% over the 12 months ending September 2026, while the all items index rose 3.7%. A pro forma that grows rent faster than prices overall assumes the opposite of that reading; local checks are in investor market analysis.

How much value change happened outside the formula in the past year?

According to the FHFA House Price Index release of August 25, 2026, U.S. house prices rose 2.1 percent between the second quarter of 2025 and the second quarter of 2026, and the East North Central division, which contains Michigan on the Census Bureau’s regions and divisions map, recorded the strongest appreciation of the nine census divisions, at 4.5 percent.

Hypothetical example, not an offer. For example, the national 2.1 percent applied to the $450,000 worked example is $9,450 of value change, slightly more than its $9,000 of cash flow, while the cash-on-cash return still reads 6.9%. A past year’s index change is not a forecast for any property.

How do Michigan property and transfer taxes enter the formula?

Property tax belongs in the numerator. It is an operating cost you subtract from rent to get annual pre-tax cash flow, so a tax line set too low makes the return look too high. For a rental, two Michigan rules raise that line. Michigan Treasury exempts only an owner’s principal residence from the local school operating millage (up to 18 mills), and MCL 211.7dd(c) limits that to the home the owner lives in. A rental pays that millage, so build the expense line on the non-homestead rate, not the seller’s homestead bill.

A Michigan home’s taxable value is capped while one owner holds it. The year after it sells, that cap comes off and taxable value resets to the state equalized value, which is half of the assessor’s estimate of market value, not automatically half of what you paid. Samantha says: “Don’t build your budget around somebody else’s tax bill.” The Michigan property tax calculator uses a school district’s non-homestead rate for a home that is not your principal residence. After the reset, MCL 211.27a(2) limits each later year’s growth in taxable value to the lesser of 5% or the inflation rate, plus additions.

Because the reset comes the year after you buy, the cash flow you divide by your cash invested should already carry the reset tax, not the seller’s bill. The buyer’s transfer notice under MCL 211.27a(10) does not change that math. Assessment basics are in property tax assessments.

Transfer tax is a closing cost, but under MCL 207.523(2) the seller or grantor is liable for the state tax, which MCL 207.525 levies at $3.75 for each $500 or fraction of $500 of value; the county tax under MCL 207.504 is 55 cents per $500 in counties under 2,000,000 people. The Newaygo County Register of Deeds example: on a $100,000 sale, the seller owes $750 state and $110 county tax. MCL 207.523(4) also refers to a buyer who has paid the tax on behalf of the seller; if your purchase agreement has you pay it, it becomes your cash and goes in the denominator.

Which other Michigan figures and rules change a rental’s return?

The Census Bureau’s Table 1, Rental Vacancy Rates by State puts Michigan’s rental vacancy rate at 6.0% in the second quarter of 2026, with a margin of error of 2.1 points, against the 7.3% national rate from the Housing Vacancy Survey; the margin is wide enough that the two may not differ. A statewide rate says little about one street, so use it to check a vacancy allowance, not to set one.

Michigan Treasury’s taxpayer notice of April 15, 2026 sets the individual income tax rate for the 2026 tax year at 4.25%, and Treasury’s city tax page reports that twenty-four Michigan cities levy taxes related to income. Cash-on-cash return is figured before all of them.

The City of Detroit’s rental property FAQ says a Certificate of Compliance is required for residential rental property, is valid for three years, and requires completing the repairs on the correction order and paying the inspection fees assessed. Repairs required before the first tenant belong in the denominator; the inspection cycle belongs in the operating budget.

EPA’s Renovation, Repair and Painting program page says anyone paid to disturb painted surfaces in homes built before 1978 must be certified and trained, and the rule applies if you rent all or part of a home; Michigan is not on EPA’s list of states running their own program, so EPA administers it here. Under 40 CFR 745.83, work disturbing 6 square feet or less of painted surface per room inside, or 20 square feet or less outside, counts as minor repair and maintenance, absent window replacement, demolition or restricted practices. Scope questions are in investing in fixer-uppers.

FAQ: Cash-on-cash return

Here are answers to common questions about cash-on-cash return.

How do you calculate cash-on-cash return?

Divide annual before-tax cash flow by the total cash you invested, then multiply by 100. Cash invested includes the down payment, closing costs and any upfront repairs, not the borrowed amount. If you put in $130,000 and the property nets $9,000 after all operating expenses and mortgage payments, your cash-on-cash return is 6.9%. Build the income side first with how to analyze a property’s rental potential.

What is a good cash-on-cash return?

Many investors target 8% to 12%, but that band is a rule of thumb, and the right benchmark depends on the market, the property’s condition and what else you could do with the money. A stabilized single-family rental in a strong rental market might justify 6%, while a management-heavy property in a thinner market should demand more. Compare against your own alternatives, not a national average. The underwriting sequence is in real estate due diligence.

What is the difference between cash-on-cash return and cap rate?

Cap rate divides net operating income by property value and ignores financing entirely, so it describes the property. Cash-on-cash return divides cash flow after debt service by the cash you invested, so it describes your deal. Two investors buying the same building at the same 8.0% cap rate can post very different cash-on-cash returns. The unleveraged side is covered in commercial real estate investing, where nearly every price is quoted as a cap rate first.

Does cash-on-cash return include appreciation?

No. It measures only the cash a property produced in a single year relative to the cash you invested. It excludes appreciation, mortgage principal paydown, depreciation and other tax effects, and eventual sale proceeds. That is why investors pair it with internal rate of return, which accounts for the full hold period including the sale. Sequencing the metrics is covered in tips for new real estate investors.

Can cash-on-cash return be negative?

Yes. When operating expenses plus annual debt service exceed what the property collects, before-tax cash flow drops below zero and so does the return. Hypothetical example, not an offer: for example, a rental that falls $2,000 short over a year on $130,000 of cash invested shows a cash-on-cash return of negative 1.5%, and that shortfall is paid from your own savings.

Does a security deposit count in cash-on-cash return?

Only the part that becomes rent. Per IRS Publication 527, a deposit you plan to return to the tenant stays out of income; an amount kept because the tenant breaks the lease terms is income that year, and a deposit to be used as the final month’s rent is advance rent, included in income when received. MCL 554.602 caps a Michigan deposit at 1 1/2 months’ rent. A returnable deposit is not your cash invested.

Do furniture and appliances count as cash invested?

Yes, when you buy them to get the property rented, which is common with furnished and short-term rentals, so that cash goes in the denominator. For taxes, IRS Publication 527 Table 2-1 lists appliances, carpets and furniture used in rental property as 5-year property under the general depreciation system. See investing in short-term rentals.

What is the difference between cash-on-cash return and return on equity?

Return on equity, as investors usually use it, divides cash flow by today’s equity, meaning current value minus the loan balance, instead of the cash you first put in. Hypothetical example, not an offer: for example, a property later worth $500,000 with a $320,000 balance has $180,000 of equity, so $9,000 of cash flow is 5.0%. See cash-out refinancing.

The bottom line on cash-on-cash return

Cash-on-cash return is annual before-tax cash flow divided by total cash invested, so $9,000 of cash flow on $130,000 of cash in is a 6.9% return. The denominator is the down payment, closing costs and upfront repairs, never the financed amount, and that single design choice is why the metric beats a cap rate for anyone using a mortgage: change the loan and the number moves, from 6.9% to 9.2% on $3,000 less annual debt service. Its blind spots are just as clear. It ignores appreciation, treats principal paydown as pure cost, stops before taxes, and describes one year only, so pair it with a full total-return view before you commit.

If you’re ready to see what your financing does to this number, talk to Align Lending. We’ll shop your one- to four-unit investment purchase or refinance across our lender network and show you the payment scenarios side by side. Call 248-506-5727 or start online. Take depreciation, deduction and entity questions to a qualified tax professional, and securities or licensing questions to the appropriate licensed professional.

Footnotes:

1. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms, a rate quote, an offer of credit, or a projection of investment returns under federal or state law. The $450,000, $112,500, $9,000, $8,500, $130,000, $337,500, $60,000, $6,000, $36,000, $27,000, $24,000, $12,000, $45,000, $90,000, $40,000 and $3,000 figures and the 4.6%, 6.9%, 8.0%, 9.2% and 10% returns used throughout are Align Lending arithmetic shown to demonstrate the formula. No interest rate, loan program or payment is quoted or implied, and the figures do not reflect any specific property, borrower or lender offer. Your own numbers depend on the property, the market, your loan terms and your underwriting. Return to text.

2. The 8% to 12% cash-on-cash return band is a widely repeated practitioner rule of thumb, not a statutory, regulatory or index-published standard, and it carries no predictive force. Target returns vary by property type, submarket, condition, management intensity, leverage and prevailing interest rates, and a sound investment can fall well outside the band in either direction. This article is not investment advice and is not an offer to sell or a solicitation of an offer to buy any security. Past performance does not predict future results, and nothing here is a projection or guarantee of any return. Return to text.

3. This is general information, not tax advice. Depreciation recovery periods, the allocation of basis between land and improvements, the deductible-versus-capitalized treatment of a given expense, passive-activity loss rules, depreciation recapture and entity choice all depend on your individual circumstances and change over time. Consult a qualified tax professional about your situation. Align Lending is a mortgage broker and does not provide tax, legal or investment advice. Return to text.

Sources: national rental vacancy rate of 7.3% in the second quarter of 2026, U.S. Census Bureau, Quarterly Residential Vacancies and Homeownership, Housing Vacancies and Homeownership (CPS/HVS), released July 28, 2026. Inability to deduct mortgage principal payments, deductibility of mortgage interest and common rental operating expenses, the 27.5-year recovery period for residential rental property under the general depreciation system, the rule that land is not depreciable because it does not wear out or get used up, and the requirement to capitalize an expense that betters, restores or adapts the property, Internal Revenue Service Publication 527, Residential Rental Property. Definition of an investment property as owned but not occupied by the borrower, the requirement that investment-property loans be underwritten in Desktop Underwriter with an Approve/Eligible recommendation other than high LTV refinance loans underwritten under the Alternative Qualification Path, the application of loan-level price adjustments to all investment-property mortgages, and the referral of maximum LTV, CLTV and HCLTV ratios to the Eligibility Matrix, Fannie Mae Selling Guide B2-1.1-01, Occupancy Types. The 8% to 12% cash-on-cash return band is drawn from general real estate investing literature and is presented as a rule of thumb only.

This article is for informational purposes only and is not intended to provide legal, financial, tax or investment advice, and it is not an offer to sell or a solicitation of an offer to buy any security. Returns, market conditions, tax rules, agency guidelines and loan program requirements change and vary by property, program and locality; confirm current financing figures with your loan officer, confirm tax treatment with a qualified tax professional, and confirm entity, lease and title questions with a Michigan attorney. Figures shown are illustrative, are not a rate quote or an offer of credit, and do not constitute an advertisement of credit terms or a projection of investment returns. Past performance does not predict future results. Align Lending is an independent Michigan mortgage broker, NMLS #2041154, financing one- to four-unit residential property, and is not a commercial lender, broker-dealer, investment adviser, syndicator or property manager.

Related resources

13-minute read

Buying a home as an investment property: A step-by-step guide

Learn how buying a home as an investment property works, from 15%+ down payments and financing options to ROI math, so your first rental starts profitable.

Read more

13-minute read

Real estate appreciation: How property values grow and why it matters

Learn how real estate appreciation works, why U.S. homes have averaged roughly 3% to 5% a year, and how forced appreciation can add to returns.

Read more

20-minute read

1031 exchanges: Rules, deadlines and benefits for investors

Learn how a 1031 exchange defers capital gains tax, why the 45-day and 180-day deadlines are absolute, and which properties qualify as like-kind.

Read more