What is a good cash-on-cash return for a rental property?

Cash-on-cash return is the most practical return metric for leveraged real estate investors. Unlike cap rate, it accounts for your actual financing terms. Unlike IRR, it is easy to calculate and understand. It answers the question that matters most to an investor writing a check: what am I actually earning on the money I put in?

The cash-on-cash formula

Cash-on-cash return equals annual pre-tax cash flow divided by total cash invested.

Annual pre-tax cash flow is your net operating income minus annual debt service: what is left after operating expenses and mortgage payments. Total cash invested is everything you brought to closing, including down payment, closing costs, and any upfront repairs or improvements before the property is rent-ready.

A worked example

You buy a triplex for $350,000 with 25 percent down ($87,500). Closing costs run $5,000 and you spend $8,000 on immediate repairs. Total cash invested: $100,500.

The property generates $42,000 per year in gross rent. After operating expenses of $16,800 (40 percent expense ratio) and annual mortgage payments of $22,212 on a $262,500 loan at 7 percent for 30 years, annual cash flow is $2,988. Cash-on-cash return: $2,988 divided by $100,500 equals 3.0 percent.

That is well below most investors' targets. The deal is not necessarily bad. The property may appreciate or rents may grow, but the current cash-on-cash signals that you are depending heavily on those outcomes to make the investment worthwhile.

What is a good cash-on-cash return?

Most experienced investors target 8 to 12 percent cash-on-cash return as a threshold for a deal to pencil. In high-demand coastal markets like San Francisco, Seattle, or New York, 4 to 6 percent is often the ceiling because prices are high relative to rents. In cash flow markets across the Midwest, Southeast, and parts of Texas, 10 percent or higher is achievable on well-selected properties.

Below 5 percent means the deal's return depends heavily on appreciation, rent growth, or both. That is not a disqualifier, but it is a risk you should price consciously, not discover after closing. Above 15 percent often signals something worth investigating: older properties with deferred maintenance, management-intensive units, or markets with slower appreciation and higher turnover.

Your personal target should account for your alternative uses of the capital. If you can earn 5 percent risk-free in a money market account, a 6 percent cash-on-cash return on a rental with real operating complexity starts to look less attractive.

What cash-on-cash does and does not capture

Cash-on-cash captures your actual return on invested dollars in year one, the full impact of your specific financing terms, and how leverage amplifies or compresses returns. It does not capture appreciation, principal paydown, or the tax benefits of depreciation. All of these can be significant over a long holding period.

Two properties with identical cash-on-cash returns can have very different total returns if one is in an appreciating market and the other is not. That is why investors look at cash-on-cash alongside a long-term ROE projection that factors in equity buildup and eventual sale proceeds.

Cash-on-cash vs cap rate

Cap rate ignores financing. It is the same regardless of whether you pay cash or borrow 80 percent. Cash-on-cash is specific to your deal: how much you put down, your interest rate, your loan term. Two investors buying the same property, one with 20 percent down and one with 30 percent down, will have different cash-on-cash returns but identical cap rates.

Use cap rate to compare properties and benchmark against the market. Use cash-on-cash to evaluate whether your specific financing makes the deal work for you.

How Realastat calculates cash-on-cash return

Realastat calculates cash-on-cash return automatically from your listing screenshot, applying market-specific expense assumptions and your financing terms. You can adjust down payment, interest rate, or purchase price and watch the return update in real time. Every deal in your portfolio shows cash-on-cash alongside DSCR, cap rate, and break-even rent so you can compare deals side by side.