Cash-on-cash return

What counts as a strong cash-on-cash number

Most buy-to-let investors treat anything from 8% to 12% as a healthy cash-on-cash return once the mortgage, insurance and maintenance reserve are already netted out of the rent. Below 5% the property is usually being bought for appreciation rather than income, and a number under 2% often means the deposit is too large for the rent it supports, or the mortgage rate is eating most of the margin.

The figure only reflects operating cash flow. It says nothing about whether the property is gaining value, so a low or even negative cash-on-cash return can still sit inside a profitable long-term plan if the buyer expects meaningful price growth or is paying down a large mortgage balance quickly.

Three deposits, three very different outcomes

Put 60,000 into a property renting for 1,800 a month, with a 1,050 mortgage payment and 250 in monthly running costs, and the monthly surplus is 500, or 6,000 a year. Against the 60,000 invested, that is a 10% cash-on-cash return, and the deposit is repaid by cash flow alone in about ten years.

Scale up to a 120,000 deposit on a property renting for 2,600 with a 1,900 mortgage and 380 in costs, and the monthly surplus falls to 320, or 3,840 a year. That works out to a 3.2% return, more than three times the cash tied up for barely half the annual cash flow gain, largely because the larger deposit bought a smaller loan-to-value discount than the rent increase justified.

A tighter deal, 45,000 down on a property renting for 1,500 with a 1,150 mortgage and 300 in costs, leaves only 50 a month, or 600 a year, in surplus. That is a 1.33% cash-on-cash return, and at that pace the deposit would take roughly 75 years of unchanged cash flow to recoup, a sign this particular financing structure is too thin to call a cash-flow investment.

Where the calculation stops holding up

The formula assumes the property is fully let every month at the stated rent. A single month of vacancy on the 1,800-rent example above erases roughly a third of the annual surplus, and repeated turnover between tenants can turn a modestly positive number negative in the first year of ownership.

It also treats the monthly mortgage payment as fixed, which only holds for a fixed-rate loan. An adjustable-rate mortgage that resets upward, or a loan nearing the end of an interest-only period that switches to repayment, changes the mortgage line in the calculation and can compress or eliminate the cash flow the return is built on.

Big one-off repairs, a new roof or boiler for instance, are not part of the monthly costs entered here, so a return calculated the month before a large capital repair can look far healthier than the year actually turns out to be. Investors who want a more conservative figure build a maintenance reserve into the monthly costs line before running the numbers rather than after a bill arrives.

Tax and market timing caveats

In the US, mortgage interest and operating expenses on a rental are generally deductible against rental income under IRS rules for residential rental property, but principal repayment is not, so a lender's amortising payment is larger than the deductible portion, meaning the after-tax cash-on-cash figure can differ noticeably from the pre-tax number this calculator produces.

Mortgage rates used in the monthly payment line move with the broader market; a rate locked at the wrong point in a rate cycle changes the return by a full percentage point or more even with an identical rent and deposit, so it is worth re-running the calculation against a current average rate rather than the rate quoted on a listing months ago.

In the UK, buy-to-let mortgage interest can no longer be deducted in full against rental income for individual landlords, replaced instead by a basic-rate tax credit, which lowers the after-tax cash-on-cash return relative to a US property with the same pre-tax numbers.

Frequently asked questions

What is a good cash-on-cash return on a rental property?

Many buy-to-let investors target 8% to 12% once the mortgage and running costs are subtracted from rent. A 60,000 deposit generating 6,000 a year in surplus cash sits right at 10%, while anything below roughly 5% usually means the deal relies on future price growth rather than yearly cash flow to be worthwhile.

How is cash-on-cash return different from cap rate?

Cap rate divides net operating income by the property's full value and ignores financing, so it stays the same whether you pay cash or take a large mortgage. Cash-on-cash return only counts the money you actually put down, so a mortgaged property with the same rent almost always shows a higher or lower percentage than its cap rate depending on how favorable the loan terms are.

Does cash-on-cash return include principal paydown?

No. It only measures the cash that clears your account each year after the mortgage payment, insurance and maintenance are paid, and the mortgage payment includes both interest and principal. Some investors separately track the principal being paid down as additional, non-cash equity, but that is not part of the cash-on-cash percentage itself.

Why does a bigger deposit lower my cash-on-cash return?

A larger deposit reduces the mortgage payment, which raises monthly cash flow, but the return is measured against the deposit itself, and the deposit usually grows faster than the mortgage saving does. In the worked example above, doubling the deposit from 60,000 to 120,000 only lifted annual cash flow from 6,000 to 3,840 less, so the percentage return fell from 10% to 3.2%.

Should I use gross rent or rent after vacancy in this calculation?

Build a vacancy allowance into the monthly rent figure before running the calculator rather than assuming full occupancy every month. A single vacant month on a 1,800-a-month rental removes about 1,800 from the year's cash flow, which can shift the return by several percentage points depending on the size of the deposit.

How does an adjustable-rate mortgage affect cash-on-cash return over time?

This calculator uses the mortgage payment you enter as fixed for the year, but an adjustable-rate loan can reset to a higher payment at the end of its introductory period, shrinking the monthly surplus and the resulting return without any change in rent. Rerun the numbers using the payment expected after a scheduled rate reset to see the return you would actually earn once it takes effect.

Sources

• IRS, Topic no. 414: Rental income and expenses — Confirms that mortgage interest and operating expenses on a rental property are generally deductible against rental income, while principal repayment is not, as published on irs.gov.
• Freddie Mac, Primary Mortgage Market Survey — Weekly average 30-year fixed mortgage rate series used to sanity-check the mortgage payment assumptions behind a cash-on-cash calculation, published by Freddie Mac.
• GOV.UK, Tax relief for residential landlords: how it's worked out — Explains the UK basic-rate tax credit that replaced full mortgage interest deductibility for individual landlords, as published by HMRC on gov.uk.