Cash-on-Cash Return
Key Takeaways
- Cash-on-cash return equals annual pre-tax cash flow divided by total cash invested, including down payment, closing costs, and renovation expenses
- Unlike cap rate, cash-on-cash return accounts for mortgage financing and leverage effects
- Strong STR cash-on-cash returns typically range from 8% to 15%, with top performers exceeding 20%
- This metric helps compare leveraged real estate against other investments like stocks or bonds
- Pair with ROI and DSCR for a comprehensive view of investment performance
How to Calculate Cash-on-Cash Return
The formula for cash-on-cash return is:
Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested x 100
Where:
- Annual Pre-Tax Cash Flow = Gross rental income - operating expenses - mortgage payments (principal + interest)
- Total Cash Invested = Down payment + closing costs + renovation/furnishing costs
Example Calculation:
| Item | Amount |
|---|---|
| Annual gross rental income | $72,000 |
| Operating expenses | -$28,800 |
| Annual mortgage payments | -$24,000 |
| Annual pre-tax cash flow | $19,200 |
| Down payment (20% of $400,000) | $80,000 |
| Closing costs | $8,000 |
| Furnishing and renovation | $22,000 |
| Total cash invested | $110,000 |
Cash-on-Cash Return = $19,200 / $110,000 x 100 = 17.5%
Why Cash-on-Cash Return Matters for Airbnb Hosts
- Measures real returns on your money: Unlike cap rate, CoC return reflects what your actual invested dollars earn after debt service
- Reveals leverage benefits: Favorable financing can amplify returns well beyond unlevered cap rates, and CoC return captures this effect
- Enables fair comparisons: Compare your STR investment performance directly against stock dividends, bond yields, or other investment alternatives
- Guides reinvestment decisions: Knowing your CoC return helps you decide whether to reinvest in the same property, buy another, or redirect capital
Cash-on-Cash Return Benchmarks
| Performance Level | CoC Return | Interpretation |
|---|---|---|
| Below average | < 6% | May underperform alternative investments |
| Average | 6% - 8% | Acceptable with appreciation potential |
| Good | 8% - 12% | Solid cash-flowing investment |
| Very good | 12% - 18% | Strong performer, above-market returns |
| Exceptional | > 18% | Top-tier, verify assumptions carefully |
Tips for Improving Cash-on-Cash Return
- Optimize your down payment: A smaller down payment increases leverage and can boost CoC return, though it raises monthly payments and risk.
- Reduce operating costs: Lower operating expenses through efficient management, smart vendor selection, and energy savings.
- Maximize revenue: Use dynamic pricing strategies to capture peak-season premiums and minimize vacancy during slower periods.
- Refinance strategically: If rates drop or your property appreciates significantly, refinancing can reduce debt service and improve annual cash flow.
- Include all cash invested: Do not forget furnishing, renovation, and closing costs - omitting them inflates your CoC return and leads to poor decisions.
Frequently Asked Questions
A good cash-on-cash return for a short-term rental is typically 8% to 15%, with top-performing properties exceeding 20%. However, what counts as 'good' depends on your market, risk tolerance, and investment goals. In expensive urban markets, 6-8% may be strong, while vacation rental markets may yield 12-20%. Compare your CoC return against local benchmarks and alternative investments.
Cash-on-cash return measures the return on your actual cash invested (including mortgage payments in expenses), while cap rate measures unlevered return on the total property value. CoC return accounts for financing leverage, making it more relevant for investors using mortgages. A property with a 7% cap rate could yield a 15% cash-on-cash return with favorable financing terms.
No, cash-on-cash return only measures annual cash flow relative to cash invested. It does not factor in property appreciation, principal paydown on your mortgage, or tax benefits. For a complete investment picture, pair cash-on-cash return with total ROI calculations that include equity growth and tax advantages.