What is a Good Cash on Cash Return?

Deciding whether or not to buy a real estate investment can be a difficult task, because factors like the economy, tenant turnover, and damage to the property are all unpredictable. 

But there are predictable factors with real estate investing that can influence your buying decision. 

Did you know that you can predict the profitability of a rental property before purchasing it?

It’s true — we’re talking about the cash on cash return formula. 

By knowing how profitable a given real estate investment can be, you can make a more educated — and profitable — investment decision.

That’s why, in this article, we’ll break down not only how to calculate cash on cash return, but also what a good cash on cash return is, along with how it compares to other real estate investing formulas. 

If you’re ready to learn everything you need to know about cash on cash return, let’s get started! 

What is Cash on Cash Return?

Cash on cash return is a formula that both new and experienced real estate investors need to know how to calculate, because it measures the income you could earn as a percentage of the cash you will invest in a property over the course of one year.

Let's take a look at an example.

Imagine you are considering two investment properties, Property A and Property B. 

Property A requires a cash investment of $100,000 and generates an annual pre-tax cash flow of $10,000. 

Property B, on the other hand, requires a cash investment of $200,000 and generates an annual pre-tax cash flow of $15,000. 

Let’s stop there for a second.

Property B seems more profitable because it generates a higher cash flow, right? 

However, when we calculate the cash on cash return, we get a different perspective.

For Property A, the cash on cash return would be 10% ($10,000 cash flow divided by $100,000 cash investment). 

For Property B, the cash on cash return would be 7.5% ($15,000 cash flow divided by $200,000 cash investment). 

Despite Property B having a higher cash flow, Property A has a higher cash on cash return.

Because a higher percentage indicates more profit, Property A would be the better investment. 

This is how formulas like cash on cash return (and gross rent multiplier) can take the guesswork out of real estate investing — and help you make sound and profitable decisions. 

What is a Good Cash on Cash Return? 

Now that we’ve broken down what cash on cash return is, let’s look at what a good cash on cash return amount is. 

Typically, a higher rate represents a higher cash on cash return and, therefore, a more profitable property. 

Generally speaking, a property with a cash on cash return between 8% and 12% to be a worthwhile investment — and a cash on cash return in the double digits, such as 20%, is highly sought after. 

Anything lower than that, or worse — negative — indicates that the property will not be profitable (and will cost you money). 

How to Calculate Cash on Cash Return

The cash on cash return formula is:

Cash on cash return = (Annual pre-tax cash flow / Total cash invested) x 100

Let’s break down how you can calculate this yourself step by step. 

First, determine the annual pre-tax cash flow generated by the investment property.

Once you have that number, the next step is to calculate the total cash invested in the property, including:

• the down payment
• closing costs
• renovation expenses

Once you have this number, you divide the annual pre-tax cash flow by the total cash invested.

Finally, multiply the result by 100 to get the cash on cash return as a percentage.

Remember, the higher the cash on cash return, the better the investment.

How to Increase Your Cash on Cash Return

If you already own a property with a low cash on cash return, or you find yourself experiencing a poor return when you anticipated a much higher one, there are things you can do to increase your cash on cash return. 

This includes:  

Lower Expenses

One of the primary factors that affects cash on cash return is your operating costs. Find ways to reduce it, both big and small. 

For example: 

• Are you using a property management service when you could be handling the property yourself? 
• Are there specific ways you can lower your utility bills? 
• Instead of paying fees to lawn service, is this something you can take care of yourself? 

Raise Rent

Increasing rental income and minimizing vacancies caused by high tenant turnover can improve your cash on cash return dramatically. 

Consider Refinancing

If you took out a traditional mortgage, explore ways to refinance with a lower interest rate. Doing so will improve your cash on cash return.  

Cash on Cash Return vs. Other Formulas

There are other real estate investing formulas that can help you make better investment decisions. 

Let’s take a look at some of them and how the cash on cash return formula compares. 

Comparing Cash on Cash Return with Return on Investment (ROI)

While cash on cash return solely focuses on cash invested, return on investment (ROI) considers the total cost of the investment, including costs such as loans. While some may think these two are interchangeable, they are not.

Cash on Cash Return and Capitalization Rate: What's the Difference?

Another real estate formula that is sometimes used integrable with cash on cash return is capitalization, or cap rate. 

While cash on cash return measures the return on the cash invested, the capitalization rate calculates the return on the property's market value. 

The Bottom Line: Cash on Cash Return

Even for the most seasoned investors, real estate investing can be difficult, which is why it’s so critical to use formulas like cash on cash return to take the guesswork out of it. 

By doing so, you can make more profitable decisions that enhance your real estate investing portfolio now and in the future. 

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