The cash on cash return formula
Annual Pre-Tax Cash Flow is the money left in your pocket after paying the mortgage (full PITI), property management, maintenance reserves, vacancy reserves, and every other recurring expense. It does not include principal paydown, appreciation, or tax benefits.
Total Cash Invested is every dollar you put into the deal out of pocket: down payment, closing costs, rehab, and holding costs during any initial vacancy. The mortgage amount is not included because it is not your money.
Step-by-step example with real numbers
A single-family rental in a Midwest market. Purchase price $150,000, financed with a conventional loan at 25% down and 7.5% interest over 30 years. The property needs $12,000 in rehab before it is rent-ready.
Step 1: Calculate total cash invested
| Item | Amount |
|---|---|
| Down payment (25% of $150,000) | $37,500 |
| Closing costs | $4,500 |
| Rehab | $12,000 |
| Total cash invested | $54,000 |
Step 2: Calculate monthly cash flow
| Line Item | Monthly | Notes |
|---|---|---|
| Gross rent | $1,150 | Market rent for 3BR in this zip code |
| PITI payment | ($1,050) | P&I on $112,500 loan + tax/insurance escrow |
| Property management (10%) | ($115) | 10% of collected rent |
| Maintenance reserve | ($50) | Roughly 4% of rent |
| Vacancy reserve (5%) | ($58) | 5% of gross rent |
| Monthly cash flow | ($123) |
Step 3: Calculate annual CoC return
Annual cash flow: ($123) x 12 = ($1,476)
Cash-on-cash return: ($1,476) / $54,000 x 100 = negative 2.7%
At a 7.5% interest rate with 25% down, this property produces negative cash flow. Many deals bought in 2023 and 2024 look like this. The numbers do not lie. This is why experienced investors run CoC before making an offer, not after closing.
The BRRR scenario: how refinance changes CoC
Now assume you bought this property below market value, rehabbed it to an ARV (after repair value) of $195,000, and did a cash-out refinance at 75% LTV for $146,250. After paying off the original $112,500 loan, you pull out $33,750 in cash.
| Metric | Before Refinance | After Refinance |
|---|---|---|
| Total cash invested | $54,000 | $20,250 |
| New PITI (higher loan balance) | $1,050/mo | $1,275/mo |
| Monthly cash flow | ($123) | ($348) |
| Annual cash flow | ($1,476) | ($4,176) |
| Cash-on-cash return | negative 2.7% | negative 20.6% |
In a high-rate environment, BRRR deals often show negative CoC on cash flow alone. The strategy works when you recover most or all of your capital and the property still appreciates. If rates drop and you refinance again at 5.5%, the same property could swing to positive cash flow. BRRR investors evaluate capital velocity (how fast cash comes back) alongside CoC. A deal where you get $50,000 back and redeploy it into the next property can outperform a deal with 10% CoC that locks up your capital for years.
What counts as "cash invested"
This is where most investors undercount. Total cash invested is not just the down payment. It includes every dollar that left your bank account to acquire, prepare, and stabilize the property.
- Down payment on the purchase loan
- Closing costs (title, attorney, recording, origination fees, prepaid insurance)
- Rehab and repair costs to get the property rent-ready
- Holding costs during vacancy (mortgage payments, utilities, insurance while the property sits empty before the first tenant)
- Furnishing costs if you are running a short-term rental
What does not count: the mortgage principal (that is the bank's money), projected appreciation, or sweat equity (your time has value, but CoC measures cash return on cash invested, not labor).
Cash on cash return benchmarks
| CoC Range | Rating | Typical Strategy |
|---|---|---|
| Below 4% | Weak | High-appreciation markets (LA, Austin) where investors bet on equity growth, not cash flow |
| 4% to 8% | Average | Conventional financing in stable B-class neighborhoods |
| 8% to 12% | Good | Well-bought properties with value-add rehab or below-market purchase price |
| 12% to 15% | Strong | Creative financing (seller finance, subject-to) or high-rent-to-price ratio markets |
| 15% and above | Excellent | BRRR with capital recovery, Section 8 in C-class markets, or lease-option strategies |
For BRRR and Section 8 deals, a 15% minimum cash-on-cash return is a reasonable floor. Below that, the risk-adjusted return does not justify the effort of rehabbing and managing C-class housing. Your threshold should match your strategy, market, and risk tolerance.
Five mistakes that make your CoC calculation worthless
Cash on cash return vs. other metrics
| Metric | What It Measures | Includes Financing? | When to Use |
|---|---|---|---|
| Cash-on-Cash Return | Annual cash flow as % of cash invested | Yes | Evaluating your personal return on a specific deal with your specific financing |
| Cap Rate | NOI as % of property value (no debt) | No | Comparing properties regardless of how they are financed. Market-level analysis |
| Total ROI | All returns (cash flow + equity + appreciation + tax benefits) as % of cash invested | Yes | Full picture of investment performance over a hold period |
| IRR | Annualized return accounting for timing of all cash flows | Yes | Comparing investments with different hold periods and cash flow timing |
CoC is the metric you check first because it tells you whether a deal puts cash in your pocket or drains it each month. Cap rate tells you if the property is priced well relative to its income. ROI tells you the full story including equity and taxes. IRR tells you which of two deals is better when the timing and hold periods differ.
How DoorVault calculates cash on cash return
DoorVault computes real-time cash-on-cash return per property using actual income and expenses, not projections from a pro forma spreadsheet that never gets updated.