How this number is made
Cash-on-cash is what a financed rental returns on the dollars you actually wrote a check for. It is not the cap rate, and it changes if you refinance.
- Cash invested is down payment, closing costs, and repairs you paid in cash.
- Cash flow is what is left after operating costs and the mortgage. Do not also subtract the down payment.
Formula
Cash-on-cash = annual cash flow ÷ cash invested.
Worked example
With the figures already in the form, cash-on-cash return is 8.00%.
Questions
Can this be negative?
Yes. A building can have a fine cap rate and still lose cash every month once the mortgage is paid. That is a negative cash-on-cash return.
Does appreciation count?
No. This ratio is cash, not a hoped-for sale price.