Cash-on-cash return (CoC) answers the only question that matters about the money you put into a rental: what is it paying you this year?
Not what the property might appreciate to. Not the total return with tax benefits and loan paydown layered on. Just: cash in versus cash out, annualized.
The formula
Cash-on-cash return = annual pre-tax cash flow / total cash invested
Both parts have precise meanings:
- Annual pre-tax cash flow is rent minus everything: operating expenses (taxes, insurance, vacancy, maintenance, management, HOA) and the full mortgage payment. If you have not built this number carefully, start with the step-by-step underwrite.
- Total cash invested is every dollar it took to get the keys and make the unit rentable: down payment, closing costs, lender fees, and any immediate repairs. Leaving out closing costs is the most common way investors flatter their own numbers.
A worked example
The $160,000 duplex from our underwriting guide, with 25 percent down at a 6.5 percent rate, produces $348 per month in cash flow after all expenses:
| Amount | |
|---|---|
| Annual cash flow ($348 x 12) | $4,176 |
| Down payment | $40,000 |
| Closing costs (about 3%) | $4,800 |
| Total cash invested | $44,800 |
| Cash-on-cash return | about 9.3% |
What counts as good?
Context decides. Two anchors help:
- The risk-free alternative. If Treasuries pay 4 to 5 percent with zero effort and zero tenants, a rental should pay meaningfully more to be worth the work and the risk. Most cash-flow investors want to see high single digits at minimum.
- The market's reality. In expensive coastal metros, positive CoC of any size is rare at today's rates. In Midwest cash-flow markets, well-bought deals still reach double digits. You can see current medians by city on the live markets page.
A rough rubric for buy-and-hold rentals in 2026:
| CoC return | Read |
|---|---|
| Negative | Not an investment; a monthly bill |
| 0 to 5% | Weak; you are betting mostly on appreciation |
| 6 to 9% | Solid in most markets |
| 10%+ | Strong; verify the inputs twice |
When a deal shows a spectacular CoC, the cause is usually an input error, not a spectacular deal. Overstated rent and understated taxes are the two classic culprits.
The mistakes that inflate CoC
- Using asking rent instead of achievable rent. Estimate rent independently; do not inherit the listing's number.
- Skipping reserves. Zero vacancy and zero maintenance is not underwriting, it is hoping.
- Ignoring closing costs in the denominator.
- Using last year's tax bill. Many counties reassess at sale price; underwrite the bill you will actually get.
CoC versus cap rate
Cap rate ignores your financing; CoC is built on it. They answer different questions, and the pairing is covered in Cap Rate vs. Cash-on-Cash Return. For a leveraged buy-and-hold investor deciding where a limited down payment goes, CoC is the more honest scoreboard.
That is also how PadSweep uses it: every listing gets a full underwrite, deals are ranked by monthly cash flow, and CoC breaks the ties. If you would rather see the survivors than run the math on every listing yourself, start a free trial.