Calculate your actual annual cash yield on the money you invested — after mortgage payments and all operating expenses.
Cap rate ignores financing. Cash-on-cash return doesn't. It measures the annual pre-tax cash flow you receive relative to the actual cash you invested (down payment + closing costs + initial repairs). This makes it the most practical metric for leveraged real estate investors — it tells you what your actual dollars are earning each year.
— Results
The formula is simple: Annual Pre-Tax Cash Flow ÷ Total Cash Invested. Cash flow = Gross rent - Vacancy loss - Operating expenses - Mortgage payments. Total cash invested = Down payment + Closing costs + Initial repairs or renovations.
You invest $65,000 (down payment + closing costs). Property earns $24,000/year gross, with 5% vacancy ($1,200), $6,000 in expenses, and $11,400 in mortgage payments. Cash flow = $24,000 - $1,200 - $6,000 - $11,400 = $5,400/year. Cash-on-cash = $5,400 ÷ $65,000 = 8.31%.
Most real estate investors target 8–12% cash-on-cash return as a baseline. Returns below 5% may indicate the property is overpriced or expenses are too high relative to rent. Returns above 15% are exceptional and warrant scrutiny — either it's a great deal or expenses are being underestimated. In competitive markets, 6–8% is often considered acceptable when paired with strong appreciation potential.