Cash on cash return is the metric every real estate investor quotes when sizing up a deal. It answers a simple question: for every dollar of your own cash tied up in this property, how many cents does it return each year?
The formula is straightforward. But CoC has a blind spot that trips up a lot of investors — especially in a 7%+ rate environment where the math works differently than it did four years ago. Here is the formula, how to run it, what counts as a good number today, and the one metric lenders care about that CoC completely ignores.
Annual Pre-Tax Cash Flow = Net Operating Income (NOI) − Annual Debt Service. Total Cash Invested = down payment + closing costs + initial capital improvements.
NOI already excludes the mortgage payment. Cash flow is what remains after debt service — what hits your bank account before income taxes. This is the number CoC divides by your equity invested.
Two things to note: CoC is a pre-tax number — it does not account for depreciation or mortgage interest deductions. And it only measures current cash yield. It does not capture equity buildup, appreciation, or the tax shield from depreciation. Those are real components of total return that CoC simply does not see.
A $250,000 single-family rental. You put 25% down ($62,500) plus $4,000 in closing costs — $66,500 in total cash invested. NOI is $20,000 per year (cap rate of 8.0%). You finance the remaining $187,500 at 7.25% on a 30-year fixed.
| Line Item | Amount |
|---|---|
| Purchase Price | $250,000 |
| Down Payment (25%) | $62,500 |
| Closing Costs | $4,000 |
| Total Cash Invested | $66,500 |
| Loan Amount | $187,500 at 7.25% / 30yr |
| Monthly Mortgage Payment | $1,279 |
| Annual Debt Service | $15,348 |
| Net Operating Income (NOI) | $20,000 |
| Annual Pre-Tax Cash Flow | $4,652 |
| Cash on Cash Return | 7.0% |
Seven percent on your equity. On an all-cash purchase of the same property, you would earn the cap rate: 8.0%. Leverage actually reduced the yield — a result of today's rate environment that we will come back to.
There is no universal benchmark, but here is the range most institutional investors and experienced operators use as a working guide:
Rate context matters. The same deal that produced 10% CoC with a 3.5% mortgage produces 7% CoC with a 7.25% mortgage — not because the property got worse, but because debt service consumed more of the NOI. A 7% CoC in 2026 is a different deal than a 7% CoC was in 2021.
Cap rate and CoC measure different things, and the gap between them tells you something important about how your financing is structured.
| Metric | Formula | What It Measures |
|---|---|---|
| Cap Rate | NOI ÷ Purchase Price | Property's unlevered return — ignores financing |
| Mortgage Constant | Annual Debt Service ÷ Loan Amount | Effective cost of debt per dollar borrowed |
| Cash on Cash | Cash Flow ÷ Cash Invested | Your equity's levered current yield |
The relationship between cap rate and mortgage constant determines which direction leverage pushes your CoC:
In our example: cap rate is 8.0%, mortgage constant is 8.19% ($15,348 ÷ $187,500). Leverage is dilutive — barely, but enough to push CoC from 8.0% to 7.0%.
At a 7.25% mortgage rate, the mortgage constant on a 30-year term is approximately 8.2%. For leverage to be accretive, the cap rate must exceed 8.2% — which means buying at a sub-12.2x gross rent multiplier in markets where properties typically trade at 15–20x. In most markets, that is not a realistic expectation on stabilized product.
You might still take on dilutive leverage — borrowing 25% of the deal for 1% of yield compression is often worth it because you preserve $183,500 of capital to deploy into another deal. The question is whether you are making that choice consciously, or whether you are running CoC in isolation and not seeing the full picture.
Four things that affect total return but do not appear in CoC:
For a metric that incorporates all of these, investors use IRR — Internal Rate of Return over a projected hold period. IRR is harder to calculate but captures the complete return picture including equity and tax effects. A deal with 7% CoC and strong appreciation in a low-tax-bracket year can easily clear 15% unlevered IRR.
DSCR — Debt Service Coverage Ratio — is the lender's filter. A deal does not get financed without clearing their DSCR minimum, typically 1.20–1.25x. CoC tells you what your equity earns assuming you get the loan. DSCR tells you whether you get the loan.
In our example:
Both numbers clear. But it is possible to have a deal where CoC looks attractive and DSCR fails — particularly on high-price, low-cap-rate assets where the rent-to-price ratio is thin. Running one without the other leaves a gap in the underwriting.
Practical sequence: Run DSCR first. If the deal does not clear 1.20–1.25x, renegotiate the price, increase the down payment, or walk away — no point optimizing CoC on a deal that cannot get financed. Once DSCR clears, run CoC to confirm your equity return meets your minimum threshold.
The Deal Analyzer calculates every metric automatically from your inputs, flags deals that fail lender thresholds, and runs sensitivity tables showing how rent and vacancy changes affect your returns. Lite $9 / Pro $29.
Get Lite — $9 See Pro — $29What is a good cash on cash return for rental property?
There is no universal threshold, but most experienced investors consider 8–12% CoC to be strong. In today's market with mortgage rates at 7–7.5%, a leveraged CoC of 6–8% is realistically solid. Below 5% CoC on a leveraged deal warrants scrutiny: you are likely in negative-leverage territory, and a small rent or vacancy miss could turn cash-flow negative. Some investors accept sub-5% CoC in strong appreciation markets, but that is a bet on price growth, not income performance.
What is the difference between cash on cash return and cap rate?
Cap rate measures the property's unlevered return — NOI divided by purchase price, ignoring how the deal is financed. Cash on cash return measures your equity's return — annual after-debt cash flow divided by the cash you invested. If you paid all cash, CoC equals cap rate. With a mortgage, they diverge. When the mortgage constant (annual debt service ÷ loan amount) exceeds the cap rate — as it does in most markets with 7%+ mortgage rates — leverage is dilutive and CoC will be lower than cap rate.
How does a 7% interest rate affect cash on cash return?
A 7.25% mortgage on a 30-year term carries a mortgage constant of approximately 8.2% — meaning every dollar of debt costs the property 8.2 cents per year in service. For leverage to improve CoC, the cap rate must exceed that constant. Most stabilized properties in competitive markets trade at 5–7% cap rates, putting them in negative-leverage territory at 7%+ mortgage rates. Deals that cash-flowed at 10% CoC with a 3.5% mortgage now produce 6–7% CoC with a 7.25% mortgage on the same property at the same price.
Why do real estate investors track DSCR alongside cash on cash return?
DSCR is the metric lenders use to determine whether a property qualifies for financing. CoC tells you what your equity earns; DSCR tells you whether you can get the loan. A deal can show an attractive CoC on paper but fail the lender's DSCR minimum of 1.20–1.25x — especially in high-rate environments where thin NOI margins barely cover debt service. Running both metrics before making an offer tells you whether the deal is financeable AND whether it is worth financing.