Cap rate (capitalization rate) is net operating income divided by purchase price. It tells you the unleveraged return a property generates. A $300,000 property producing $18,000 NOI has a 6% cap rate. It's the most common metric for comparing rental properties because it strips out financing and gives you an apples-to-apples comparison.

What is a good cap rate for rental property?

For residential rentals, 5-8% is generally considered solid. Above 8% is excellent but often comes with higher risk (rougher neighborhoods, older buildings, declining markets). Below 5% is common in expensive metros where investors rely more on appreciation than cash flow.

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

Cap rate ignores financing — it measures the property's return as if you paid all cash. Cash-on-cash return measures your actual return on the cash you invested, factoring in your mortgage. A property with a 6% cap rate could yield a 12% cash-on-cash return with leverage.

What is the 1% rule in real estate?

The 1% rule says monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month. It's a quick screening tool — many successful rentals don't pass the 1% rule, especially in higher-priced markets.

What is the BRRRR strategy?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You buy a distressed property below market value, renovate it, rent it out, then do a cash-out refinance based on the new appraised value to pull out most or all of your original capital and repeat the process.

Where does CapRateCity get its data?

Our city-level data draws from publicly available sources including U.S. Census Bureau population and income figures, Zillow Home Value Index for median prices, HUD Fair Market Rents, and state/county tax assessor records. Data is updated periodically.

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Cash on Cash Return: What It Is, How to Calculate It, and What's Good

The metric that tells you what your actual invested dollars are earning. Not the property's return — your return.

8 min read · CapRateCity.com

Cash on cash return answers the most fundamental question in real estate investing: for every dollar I put into this deal, how many dollars am I getting back each year? It is the clearest measure of your personal return on invested capital, and it accounts for something cap rate completely ignores — your mortgage.

The Formula

Cash on Cash Return = Annual Cash Flow / Total Cash Invested x 100

Annual Cash Flow is your rental income minus every expense including your mortgage payment. This is the actual money that hits your bank account over 12 months.

Total Cash Invested is every dollar you put into the deal: down payment, closing costs, any upfront repairs, and inspection fees. It does not include the loan amount because that is the bank's money, not yours.

What Makes It Different from Cap Rate

Cap rate measures the property's return as if you paid all cash. It strips out financing entirely. Cash on cash return includes your mortgage payment and measures what you actually earn on the cash you personally invested.

This distinction matters enormously. A property can have an attractive 6% cap rate but deliver a mediocre 2% cash on cash return if you are financing at a high interest rate. Conversely, a property with a modest 4% cap rate could produce a strong 10% cash on cash return if you secure favorable financing terms.

Think of it this way: Cap rate evaluates the property. Cash on cash return evaluates the deal — property plus financing combined. Both matter, but they tell different stories.

A Complete Example

You are buying a rental property for $200,000. You put 20% down ($40,000) and pay $5,000 in closing costs. Total cash invested: $45,000.

The property rents for $1,400/month ($16,800/year). Your monthly expenses break down as follows: property taxes $200, insurance $100, maintenance reserve $140, property management $112 (8% of rent), and vacancy reserve $48 (roughly one-third of a month per year). Total operating expenses: $600/month.

Net operating income: $1,400 - $600 = $800/month = $9,600/year. This gives you a cap rate of 4.8% ($9,600 / $200,000).

Now add the mortgage. Your loan is $160,000 at 7% for 30 years. Monthly payment: approximately $1,064.

Monthly cash flow: $1,400 rent - $600 expenses - $1,064 mortgage = -$264/month. Annual cash flow: -$3,168.

Cash on cash return: -$3,168 / $45,000 = -7.0%.

The financing gap: This property has a reasonable 4.8% cap rate, but the cash on cash return is deeply negative because borrowing at 7% on a 4.8% cap rate property means your financing costs exceed the property's yield. This is negative leverage in action, and it is the reality of many deals in today's rate environment.

What Happens When Rates Change

Using the same property, let us see how different interest rates change the cash on cash return:

At 7% interest: mortgage $1,064/mo, cash flow -$264/mo, CoC return -7.0%.

At 6% interest: mortgage $959/mo, cash flow -$159/mo, CoC return -4.2%.

At 5% interest: mortgage $859/mo, cash flow -$59/mo, CoC return -1.6%.

At 4% interest: mortgage $764/mo, cash flow +$36/mo, CoC return +1.0%.

At 3.5% interest: mortgage $718/mo, cash flow +$82/mo, CoC return +2.2%.

The property did not change. The rents did not change. The expenses did not change. But the cash on cash return swung from -7% to +2.2% based entirely on financing. This is why cash on cash return is essential — it captures the reality of your specific deal structure.

Calculate your cash-on-cash return →

What Is a Good Cash on Cash Return?

8-12%: Strong return

This is the range most experienced investors target. At 10% cash on cash, $50,000 invested generates $5,000 per year in actual cash flow. Deals in this range typically require either a below-market purchase price, above-average rents, a low interest rate, or some combination of all three.

5-8%: Acceptable in growth markets

In markets with strong appreciation potential like Austin, Nashville, or Raleigh, investors will accept lower cash returns because they expect property values to climb 3-5% annually. The total return (cash flow plus appreciation plus equity paydown) can still be excellent even when cash on cash is modest.

Under 5%: Typically too thin

Below 5%, the cash return barely exceeds what you could earn in a high-yield savings account or Treasury bonds — with none of the hassle of being a landlord. Deals under 5% only make sense if appreciation potential is very strong or if you are buying with a refinance plan that will improve returns once rates drop.

Negative: Proceed with extreme caution

Negative cash on cash means you are paying money every month to own the property. This can make sense as a short-term situation if you are confident rates will drop and you will refinance, or if the property is in a rapidly appreciating market. But negative cash flow drains reserves, and if it persists longer than expected, it can force a sale at a bad time.

How Leverage Amplifies Returns (and Risk)

Leverage is the reason cash on cash return exists as a separate metric from cap rate. When you borrow money to buy real estate, you are amplifying your returns — in both directions.

Positive leverage occurs when your cap rate exceeds your cost of borrowing. A 7% cap rate property financed at 5% interest produces a cash on cash return higher than the cap rate because every borrowed dollar earns more than it costs. This is how investors historically generated 12-15%+ cash on cash returns during low-rate periods.

Negative leverage occurs when your cost of borrowing exceeds the cap rate. A 5% cap rate property financed at 7% interest produces a cash on cash return lower than the cap rate because every borrowed dollar costs more than it earns. This is the current environment for many markets.

Cash on Cash vs Cap Rate: Quick Comparison

Cap rate ignores financing, measures property performance, best for comparing properties and evaluating markets. Use our cap rate calculator to run the numbers.

Cash on cash return includes financing, measures your personal return, best for evaluating specific deals and comparing financing options.

Use both together. Cap rate tells you if the property is worth owning. Cash on cash tells you if the deal is worth doing right now with current financing. A property with a great cap rate but terrible cash on cash return might be worth buying if you can finance it better later. A property with a great cash on cash return but low cap rate might mean you got a great loan on a mediocre property.

When to Use Cash on Cash Return

Calculate cash on cash on every deal before you make an offer. Run it with your actual financing terms, not hypothetical numbers. Compare deals side by side to see which one puts more cash in your pocket per dollar invested. Then use our market data to find cities where the numbers work.

For mortgage payment calculations, use the mortgage calculator to model different down payment and rate scenarios. And check MortgageMathLab.com for deeper analysis on how different loan structures affect your monthly payment and total cost of ownership.

Bottom line: Cash on cash return is the most honest metric in real estate investing because it measures what actually happens to your money. Cap rate is useful for property analysis, but cash on cash is what determines whether a deal works for you specifically, with your financing, your down payment, and your closing costs. Always run both numbers.

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