Cash-on-cash return answers the question the cap rate ignores: what am I earning on the money I actually invested? Because it counts your loan, it's the metric that reflects your deal — down payment, rate, and all.
How to compute it
Cash-on-cash = annual pre-tax cash flow ÷ total cash invested. Cash flow is NOI minus annual debt service. Cash invested is the down payment plus closing costs plus any upfront rehab — everything that left your pocket to get the keys. It's a first-year, pre-tax snapshot, not a lifetime return.
Typical ranges
For US buy-and-hold rentals, 6–10% cash-on-cash is a common target; 4–6% shows up in strong appreciation markets where investors accept thinner cash flow, and 10%+ usually comes with more risk or more work. Compare it to what the same cash earns elsewhere — but remember rentals also build equity through principal paydown and appreciation, which this metric doesn't capture.
Worked example
You buy a $280,000 single-family rental with 25% down ($70,000) plus $8,000 in closing costs — $78,000 cash in. NOI is $19,600. The $210,000 loan at 6.5% over 30 years costs about $15,900/year in debt service. Cash flow = $19,600 − $15,900 = $3,700. Cash-on-cash = $3,700 ÷ $78,000 = 4.7%. Thin — the deal leans on appreciation and principal paydown to justify itself.
When this rule of thumb breaks
Cash-on-cash flatters deals with maximum leverage right up until a vacancy or repair wipes out the thin cash flow — a high number with no reserve is fragile, not good. It also ignores equity growth entirely, so it undervalues fast-amortizing loans and appreciating markets. And year one is the worst year to extrapolate: rents rise, and a stabilized year two often looks materially different. Use it as a screening tool, not a verdict.