What Is a Good Cash-on-Cash Return on Rental Property?

A good cash-on-cash return on rental property is commonly cited as somewhere between 8 and 12 percent, with many investors treating 8 percent as a floor for a stabilized long-term rental. That range is a convention among investors, not a law of the market, and the honest answer is that a good return is one that beats what you could earn on the same money at similar risk somewhere else.

Cash-on-cash return is the metric that tells you what your money is doing this year. It is simple, it is hard to fudge, and it is the number that most often exposes a deal that looked fine on the listing.

What is the cash-on-cash return formula?

Annual pre-tax cash flow divided by total cash invested.

Cash-on-cash return = annual pre-tax cash flow / total cash invested

Annual pre-tax cash flow is rent collected minus all operating expenses minus debt service. Total cash invested is everything you actually spent to get the property producing: down payment, closing costs, loan fees, and any up-front repairs.

Two mistakes account for most inflated cash-on-cash numbers. The first is leaving reserves out of the expense side, meaning no vacancy allowance, no maintenance, and no capital expenditure line. The second is leaving rehab and closing costs out of the cash-invested side, which shrinks the denominator and flatters the result.

What counts as a good number?

Here is how investors generally think about the ranges. These are conventions and rules of thumb rather than measured market data, and they move with interest rates.

Context changes the bar completely. When financing is expensive, the same property produces a lower cash-on-cash return without anything about the property changing, which is why an 8 percent target that was easy in one rate environment can be genuinely hard in another. A short-hold value-add project should demand a much higher number than a stabilized rental in a market you expect to hold for twenty years.

A worked example (illustrative only)

These figures are invented to show the arithmetic, not drawn from any specific market.

An investor buys a single-family rental for $240,000 with 25 percent down.

The property rents for $2,300 per month, or $27,600 per year. Cash-on-cash return is $3,264 divided by $72,000, which is 4.5 percent.

That is a real result, and it is below the range most investors target. Notice that the naive version of this calculation, rent minus mortgage payment, would have shown roughly $1,162 per month of apparent profit. The reserves and the management fee are what move it from looking great to looking marginal.

How sensitive is the number to rent?

Very. Holding the same purchase price, loan, taxes, and insurance, here is what happens as rent changes.

A $450 per month swing in rent, roughly 20 percent, moves the return from 2.6 percent to 8.4 percent. That is why rent accuracy matters more than almost any other input in the model. Getting the rent estimate wrong by $200 is the difference between a deal you would buy and one you would not.

You can run these variations yourself in the free cash-on-cash calculator, or model the full property in the rental property calculator.

How does leverage change cash-on-cash return?

Leverage amplifies whatever is already happening. When the property's unlevered yield is higher than your borrowing cost, more debt raises cash-on-cash return. When your borrowing cost is higher than the property's unlevered yield, more debt lowers it, and past a certain point it turns the number negative.

In the example above, net operating income of $16,920 on a $252,000 all-in basis is a 6.7 percent unlevered yield against a 6.5 percent loan. The spread is razor thin, which is exactly why the levered return is only 4.5 percent. Interest is not the only cost of the loan, principal repayment also consumes cash flow, and that shows up here.

Two practical consequences follow. Paying cash produces a lower cash-on-cash return than a well-financed purchase in a healthy-spread environment, but it is far more stable. And in a tight-spread environment, adding leverage to a mediocre property does not fix it, it just makes the same problem larger. You can test different loan structures against the same property in the mortgage calculator.

When is cash-on-cash the wrong metric?

• •On a BRRRR or heavy value-add. Once you refinance and pull most of your capital back out, the denominator gets very small and the percentage becomes unstable or meaningless. Model those in the BRRRR calculator instead.
• •On a house hack. Your own housing cost is part of the return, and cash-on-cash does not capture it.
• •In year one of a repositioning. A property mid-turnaround will show a bad number that says nothing about where it lands stabilized.
• •When comparing across risk levels. A 9 percent return in a market with steady demand is not equivalent to a 9 percent return in a market with volatile occupancy.

The input that decides everything

Every cash-on-cash number rests on two estimates: what the property is worth and what it will rent for. If either is off, the return is off, and no amount of formula precision fixes bad inputs.

That is worth spending real time on. Look at the actual comparable sales and rentals behind any estimate rather than accepting a single number. Resideline shows the comps behind a valuation and lets you adjust them, and estimates are frozen when a property lists and then graded against the real closing price, with the results published on the public accuracy dashboard. Live valuations currently cover 31 states.

Once you trust the rent and value inputs, run the deal end to end in the deal analyzer. A good cash-on-cash return is not a specific number you memorize, it is the number that clears your own bar after every real expense is in the model.