Cash on Cash Return
Cash on Cash Return Definition – A 60-Second Definition
Cash on cash return (CoC) measures how much pre-tax cash a property generates each year relative to the cash you actually invested (your equity out of pocket). Unlike total ROI or IRR, CoC focuses on today’s rental income and annual cash flow, not long-term appreciation or principal paydown. Real estate investors use it as a quick screen before deeper analysis.
Why it matters (quick takeaways):
- Clarity: Simple calculator—cash in vs. cash out—great for fast comparisons.
- Leverage lens: Shows how financing affects your equity return.
- Liquidity focus: Useful if your priority is cash flow today, not just future gains.
Cash on Cash Return Formula (with and without financing)
Core formula:
Cash on Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested
Breakdown of terms:
- Annual Pre-Tax Cash Flow ≈ Net Operating Income (NOI) − Annual Debt Service (principal + interest) − Recurring CapEx reserves.
- Total Cash Invested = Down payment + buyer closing costs + initial repairs/CapEx you pay in cash (+ loan fees paid upfront).
All-cash (no debt):
CoC = NOI ÷ Cash Invested (purchase + closing + initial CapEx)
With financing (typical):
CoC = (NOI − Annual Debt Service − CapEx reserves) ÷ (Down Payment + Closing Costs + Initial CapEx)
Quick Calculator (Example)
- Gross rental income: $30,000
- Vacancy/credit loss: −$1,500
- Operating expenses: −$12,000
- NOI = $16,500
- Mortgage payment (P&I): −$12,600
- Recurring CapEx reserve: −$1,200
- Pre-Tax Cash Flow = $2,700
- Cash invested: $70,000
CoC = $2,700 ÷ $70,000 = 3.86%
Cash on Cash Return vs. Cap Rate
- Cap rate = NOI ÷ Purchase Price (unlevered yield).
- CoC = (NOI − Debt Service − CapEx) ÷ Cash Invested (levered yield).
- Use cap rate for asset comparison, CoC for your equity return with financing.
Cash on Cash Return vs. IRR
- IRR captures timing of all cash flows including sale proceeds.
- CoC measures one-year cash yield only.
- Best practice: screen with CoC, validate with IRR.
What Is a “Good” Cash on Cash Return?
No universal number—depends on market, risk, property class, and financing. Many investors in the U.S. aim for mid-single digits in prime markets and higher in cash-flow-heavy areas.
Worked Scenarios
- 10% CoC: $0.10 in pre-tax cash per $1 invested.
- 12% CoC: Strong for stabilized rentals—check assumptions.
- 20% CoC: Usually value-add or higher risk.
What CoC Includes—and Doesn’t
Includes: rental income, operating expenses, debt payments, CapEx reserves.
Excludes: depreciation, principal paydown benefit, appreciation, sale proceeds, taxes (unless after-tax CoC).
Tips to Improve CoC
- Reduce operating leaks (utilities, maintenance).
- Budget realistic CapEx reserves.
- Shop financing terms.
- Focus on tenant quality and occupancy stability.
- Avoid over-investing cash without return.
How InvoiceFly Helps
- Track rental income and expenses automatically.
- Snap and categorize receipts into OpEx or CapEx.
- View equity snapshots, cash flow, and ROI in real time.
FAQs Cash on Cash Return
Cash-on-cash return is a real estate investment formula that measures the annual pre-tax rental income you receive from a rental property as a percentage of the total equity you invested. It focuses on actual cash flow versus the amount of cash you put in, without factoring in appreciation, loan principal reduction, or changes in capitalization rate. Many investors use a cash-on-cash return calculator to quickly estimate this metric before deeper analysis.
A “good” cash-on-cash return varies by market conditions, cap rate vs. CoC comparisons, property type, and risk profile. Many rental property investors target mid-single digits in prime markets and higher returns (8–12% or more) in cash-flow-heavy areas or value-add deals. Always compare with ROI, IRR, and local capitalization rate benchmarks.
A 10% cash-on-cash return means you earn $0.10 in pre-tax cash for every $1 of equity invested. For example, if your calculator shows that you invested $80,000 in a rental property, you would generate $8,000 in annual pre-tax rental income. This figure is often compared against market cap rates and other return metrics.
Yes, a 12% CoC return is generally considered strong for a stabilized rental property. However, you should verify that it’s based on realistic assumptions for rental income, operating expenses, vacancy, and capital expenditures. Cross-check with cap rate vs. CoC and IRR calculations to ensure the return is sustainable.
A 20% cash-on-cash return is exceptional and often appears in high-yield or value-add rental property opportunities. It may also signal higher risk due to property condition, location, or tenant turnover. Investors should validate these numbers with a detailed formula calculation and compare against ROI and IRR projections.
By default, cash-on-cash return is calculated on a pre-tax basis and does not include income taxes. Some investors prefer to compute an after-tax version in a calculator by factoring in depreciation, interest deductions, and other tax effects. This is separate from capitalization rate or ROI measures.
There is no universal rule, but many rental property investors aim for returns higher than alternative safe investments—often starting around 8% in cash-flow markets. The ideal threshold depends on cap rate vs. CoC in the area, your financing terms, and your required ROI.
One disadvantage is that cash-on-cash return only measures current annual cash flow and ignores other important factors such as property appreciation, loan amortization, and the timing of cash flows—all of which are captured by IRR or multi-year ROI analyses.
If you sell a rental property without ever claiming depreciation, the IRS generally still assumes you did and will recapture the depreciation at sale. This can result in a tax bill on the unclaimed depreciation, affecting your after-sale ROI and IRR. Always consult a tax professional before selling.
