Cash-on-cash return: what your own money earns in a year

Cash-on-cash return is a year of cash flow divided by the cash you put into the deal. It is the return on your money, as opposed to the return on the property, and it is the number that changes when the financing changes.

The formula is simple. What goes in the bottom of it is where most quotes go wrong.

Nothing here is sent anywhere and nothing is stored. The figures loaded are Maple Street Duplex in the Rental Property Analyzer: $3,911.86 of cash flow in the first year, after every expense and the loan. Use a negative cash flow if the property loses money.

Closing costs, repairs before the first tenant and the reserve you set aside are money that left your account to make this deal happen. Divide by the down payment alone and the return looks better than it is, and that is the easiest way to make a deal look better than it is. The Rental Property Analyzer divides by all of it.

Cap rate leaves the loan out and describes the building; cash-on-cash puts the loan in and describes your deal. A property can have a healthy cap rate and a thin cash-on-cash return when the loan is expensive, and the reverse when it is cheap. How cap rate is built.

Cash-on-cash also freezes on the day you buy: the cash you put in never changes, so the number ignores the equity you build as the loan is paid down and the property gains value. Return on equity, the last column of the Analyzer's thirty-year projection, is the version that moves with time, and the one that answers whether your money should stay where it is.

And it says nothing about whether the payment is covered with room to spare. That is DSCR. What DSCR measures.

The Rental Property Analyzer works out cash-on-cash on every dollar you put in, for one property with up to eight units, and shows it next to a downside and an upside case. For five properties at once with the quick version of the same return, the Deal Screener is free.