Understanding the formula for cash-on-cash return

real estateinvestingrental property

Sophie_R

Joined:
20.02.2021
Posts: 2370

Topic Starter

26.01.2025 23:07

I am currently analyzing my first potential rental property and keep seeing 'cash-on-cash return' mentioned in all the investment calculators. I understand it's supposed to measure my actual annual return, but I'm getting confused about whether to include closing costs and renovation expenses in the initial investment figure. Does the calculation change if I am using a hard money loan versus a traditional mortgage? I want to make sure I am comparing apples to apples before I pull the trigger on an offer. Any advice on how you guys typically calculate this would be greatly appreciated.

12 replies in this topic

Gosh_Bolo

Joined:
26.05.2023
Posts: 579

30.01.2025 16:09

Cash-on-cash is definitely your best friend for initial screening. Always include your total out-of-pocket cash-that means down payment, closing costs, and immediate renovations. If you don't include those, your return will look artificially inflated.

new_here

Joined:
12.08.2022
Posts: 1440

09.06.2025 02:09

In reply to a previous post

Adding to what the first person said, definitely include the rehab costs. If you're spending 20k to make the property rentable, that's capital you've tied up, so it needs to be in the denominator.

uncle_joe

Joined:
03.01.2022
Posts: 567

28.06.2025 23:54

Does anyone have a spreadsheet template they use for this? I'm always worried I'm missing a hidden expense.

questioner

Joined:
09.04.2025
Posts: 1335

29.06.2025 08:31

In reply to a previous post

Regarding your question on loans, yes, the calculation changes significantly. Hard money usually has higher points and interest, which eats into your annual cash flow, so your CoC return will look lower compared to a standard 30-year fixed rate. You have to account for those higher monthly debt service payments.

Yani_Z

Joined:
10.05.2023
Posts: 1702

18.07.2025 12:23

Keep it simple: (Annual Pre-Tax Cash Flow) / (Total Cash Invested). Don't overcomplicate it with theoretical gains or tax benefits; keep those for your IRR calculation.

SimpleMan

Joined:
07.07.2023
Posts: 213

03.08.2025 16:08

In reply to a previous post

I personally exclude closing costs if I'm just doing a quick 'back of the napkin' calculation, but for a final offer, you absolutely have to include them to get an accurate picture.

WhiteCrow

Joined:
22.12.2020
Posts: 2351

08.08.2025 04:18

In reply to a previous post

I think a lot of beginners forget to factor in the vacancy rate when calculating their annual cash flow. Your CoC is only as good as your estimated income numbers.

radek_c

Joined:
21.07.2022
Posts: 2106

10.09.2025 06:25

Great question. I always tell people that CoC is a snapshot in time. It doesn't tell the whole story of appreciation, but for immediate cash flow, it's the gold standard.

Amelie_Z

Joined:
25.07.2021
Posts: 1518

07.01.2026 11:08

In reply to a previous post

Have you considered how long you plan to hold the property? If it's a flip vs. a long-term buy and hold, your metrics should probably shift.

simon_v

Joined:
08.09.2021
Posts: 1246

13.01.2026 04:51

In reply to a previous post

I've been investing for five years and I still use the exact same formula. Total cash invested is the key. If you put 50k into the deal, you need to see a return on that 50k, not just the down payment.

Yaro_K

Joined:
06.12.2020
Posts: 1409

17.02.2026 03:26

Don't let the math paralyze you. Just be consistent with how you calculate it across every property you look at, and you'll be able to compare them effectively.

Vic_S

Joined:
19.04.2021
Posts: 617

19.02.2026 18:18

In reply to a previous post

I agree with that. The most important thing is consistency. If you change your formula for every house, you're just lying to yourself.

Understanding the formula for cash-on-cash return

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