Cash on Cash Return Formula
Every version of the formula, the worked example, and the common mistakes.
The formula, step by step
The formula in full: annual pre-tax cash flow = (monthly rent + other monthly income − monthly operating expenses − monthly mortgage payment) × 12. Total cash invested = down payment + closing costs + upfront renovation. Cash on cash return = annual pre-tax cash flow ÷ total cash invested × 100.
A worked example you can verify by hand. Purchase price $300,000 with 20% down ($60,000), a 30-year loan at 6.5% on $240,000 gives a monthly payment of $1,517. Monthly rent $2,400 and other income $50, minus $500 of operating expenses and the $1,517 payment, leaves $433 of monthly cash flow — $5,196 per year. Add roughly 2% closing costs ($6,000) and the total cash invested is $66,000. That is a 7.87% cash on cash return.
Common mistakes
Using the loan amount in the denominator. Only cash out of pocket counts — down payment, closing costs, renovation. The bank's money is not your invested capital.
Forgetting debt service in the numerator. Cap rate ignores the mortgage; cash on cash does not. If you subtract nothing for the loan you have computed a levered number that lies.
Leaving vacancy and CapEx out of operating expenses. A unit that sits empty two months a year is not a rounding error. Most underwriting uses a vacancy factor of 5-8% and a CapEx reserve of $50-100 per unit per month.
