Cash on Cash

What it is

Cash on cash is annual pre-tax cash flow divided by the actual cash you put into the deal. Down payment, closing costs, rehab, holding costs, reserves — all of it. If you put $40,000 cash into a rental and it throws off $4,000 a year in net cash flow, you’re at 10% cash on cash.

It is not ROI. It is not total return. It is one specific question: what is my bank account doing each year, relative to the pile of money I parked in this property? It ignores appreciation, tax benefits, and mortgage paydown. On purpose. Cash on cash measures the part of the return that shows up as checks you can deposit.

Why it matters

For a rental investor, cash on cash is the floor. If the number is negative, you’re subsidizing your tenant. If it’s thin but positive, you’re in the game. I treat it as a survival metric, not a bragging metric.

The number looks smaller than rookie investors expect. The 31 percent rule explains why: 7% vacancy + 8% maintenance + 8% capex + 8% PM fees = 31% of gross rent gone before the mortgage is paid. A $1,800/month rent on a $200K property after all that runs closer to $42 a month in actual cash flow. That’s what 600+ doors of operating history looks like, not a spreadsheet guess.

That number scares beginners because every guru pro-forma shows triple it. But cash on cash alone undersells a good rental. The other three wealth engines — appreciation, equity paydown, and tax advantages — do heavy lifting on top. A rental at 4% cash on cash can still throw off a combined return north of 30% once you add the other engines. Don’t reject a deal on cash on cash alone.

How it shows up

The trap is banking on a high cash on cash number early in the life of a rental. The first two years are the lumpiest — make-ready costs, tenant surprises, the water heater that picks the wrong day to die. Those years eat into the advertised number. By year three or four, rent has bumped and the property settles into its steady-state yield.

Cash on cash also shifts with financing. The same property on a 65% loan versus 80% loan looks like two different deals. More debt shrinks the cash in, which inflates the ratio. Don’t confuse a high ratio with a safer deal.

Related

wealth engines, cash flow, 31 percent rule, noi, cap rate, four controls