Real Estate Tax Calc
Step 1: Monthly cash flow
Subtract operating expenses and your mortgage payment from monthly rent. That's the cash the property actually puts in your pocket each month.
Step 2: Annualize
Multiply monthly cash flow by 12 to get annual pre-tax cash flow.
Step 3: Divide by cash invested
Divide annual cash flow by your total cash invested (down payment + closing costs + rehab), then multiply by 100. Example: $500/mo → $6,000/yr ÷ $60,000 = 10%.
The formula, stated precisely
Cash-on-cash return is a one-year, pre-tax cash yield on the actual dollars you have tied up in a deal. The formula is annual pre-tax cash flow ÷ total cash invested × 100. Two things make it different from other return metrics. First, the numerator is cash flow after the full mortgage payment — both principal and interest — not net operating income, so a leveraged deal and an all-cash deal on the same building produce very different cash-on-cash numbers. Second, the denominator is only the cash you actually put in, not the purchase price. Because it uses real cash in and real cash out, it answers a simple, practical question: for every dollar of my own money in this deal, how many cents of spendable cash did it throw off this year?
A complete worked example, line by line
Numbers make it concrete. Suppose you buy a single-family rental for $250,000 with 25% down. Your cash to close and stabilize the property looks like this: $62,500 down payment, $6,000 in closing costs (lender fees, title, escrow, recording), and $8,000 in initial repairs to make it rent-ready — a total of $76,500 invested.
Now the income side. The property rents for $2,100/month, or $25,200 a year. Annual operating expenses — property taxes, insurance, property management at 8%, maintenance, and a vacancy reserve — come to about $8,400. That leaves net operating income of $16,800. Your mortgage on the $187,500 loan runs roughly $1,180/month, or $14,160 a year in principal and interest. Annual pre-tax cash flow is therefore $16,800 − $14,160 = $2,640.
Divide: $2,640 ÷ $76,500 = 3.5% cash-on-cash. That single number now lets you compare this deal to a different property, to a REIT, or to a bond — on an apples-to-apples cash-yield basis.
What counts as 'cash invested'
Getting the denominator right is where most people slip. Total cash invested is every out-of-pocket dollar it took to acquire and stabilize the property: the down payment, closing costs (loan origination, title insurance, escrow, appraisal, recording, prepaid items), any upfront rehab or make-ready costs, and any carrying costs you paid before the property produced income. What is not in the denominator is the loan itself — the bank's money is not your invested cash. If you later do a cash-out refinance and pull some of your capital back out, your remaining cash invested drops, which is why refinancing can dramatically change (and often inflate) a reported cash-on-cash figure.
What belongs in 'cash flow' — and what doesn't
The numerator is pre-tax cash flow, so include everything that actually moves cash: rent collected, minus operating expenses, minus the full debt-service payment. Deduct realistic vacancy and capital-expenditure reserves even though you may not spend them every month — a return that assumes 100% occupancy and no roof replacement overstates itself. Do not subtract depreciation: it is a non-cash accounting deduction that lowers your taxable income but never leaves your bank account, so it has no place in a cash-flow calculation. Likewise, the principal portion of your mortgage payment is cash out the door and stays in the numerator, even though it is really building your equity rather than being 'lost.'
Pre-tax versus after-tax cash-on-cash
The standard metric is pre-tax, which keeps deals comparable across investors in different brackets. But your real yield depends on taxes, and rental real estate is unusually tax-favored. Depreciation often shelters much or all of the cash flow from income tax in the early years, so your after-tax cash-on-cash can actually be higher than the pre-tax figure — the reverse of most investments. To compute an after-tax version, estimate the property's taxable income (cash flow plus principal, minus depreciation), apply your marginal rate to get the tax, and subtract it from — or add the tax savings to — the pre-tax cash flow. Because this varies by taxpayer, use pre-tax cash-on-cash to screen and after-tax to make a final decision.
Common mistakes that distort the number
A few errors show up again and again. Omitting closing costs and rehab from cash invested makes the return look better than it is. Ignoring vacancy and capex reserves inflates cash flow. Confusing NOI with cash flow — forgetting to subtract the mortgage — overstates the yield on a leveraged deal. Using projected instead of actual rents, or a below-market management assumption, produces a number you cannot achieve. And comparing a year-one cash-on-cash (often depressed by upfront costs and lease-up) to a stabilized figure without noting the difference leads to bad comparisons. When you benchmark two properties, make sure both were calculated the same way.
How cash-on-cash relates to cap rate, ROI, and IRR
Cash-on-cash is one member of a family of return metrics, and each answers a different question. Cap rate (NOI ÷ price) ignores financing entirely and measures the property's unleveraged yield — useful for comparing buildings but blind to your loan. ROI usually captures total return, adding appreciation and principal paydown to cash flow, so it is bigger-picture but definition-dependent. IRR is the most complete measure because it accounts for the timing of every cash flow over the entire hold, including the eventual sale — but it requires a full multi-year projection. Cash-on-cash sits at the practical end: a single, easy-to-compute, one-year cash yield that is perfect for quickly screening deals before you build a full model.
How financing changes the answer
Because cash-on-cash divides cash flow by your money, the amount you borrow reshapes the result. Pay all cash for the $250,000 property in the earlier example and there is no mortgage: your cash flow is the full $16,800 of NOI, but your cash invested is the entire ~$264,000, giving a cash-on-cash of about 6.4%. Put 25% down and you invest far less ($76,500) while giving up the mortgage payment — landing at 3.5% in that example because the loan was expensive relative to the property's yield. The direction of the effect depends on whether the property's unleveraged return (its cap rate) exceeds your loan's cost. When the cap rate is higher than the mortgage rate, leverage lifts cash-on-cash (positive leverage); when the loan costs more than the property yields, leverage drags it down. That is why identical buildings can show wildly different cash-on-cash figures depending purely on the financing.
What counts as a 'good' cash-on-cash return
There is no universal threshold, because the right target depends on the strategy and the market. Many buy-and-hold investors look for something in the roughly 6–10% range on a stabilized rental, but a cash-flow-focused investor in an inexpensive market might insist on more, while an investor in an expensive, high-appreciation metro may accept a low or even negative early cash-on-cash in exchange for expected price growth. Compare the number to your alternatives: a risk-free Treasury, a dividend stock, or a REIT. Real estate should generally pay a premium over those to compensate for its illiquidity, management effort, and concentration risk. A '10% cash-on-cash' also means little without knowing the assumptions behind it — always ask how vacancy, reserves, and management were treated.
The limits of the metric
Cash-on-cash is a screening tool, not the whole story, and leaning on it too hard leads to bad decisions. It captures only one year, so it misses rent growth, future rate resets on adjustable loans, and the lumpy timing of big capital expenditures. It ignores appreciation and loan paydown entirely — two of the largest wealth-building levers in real estate — so a low-cash-on-cash property in an appreciating area can still be the better long-run investment. And it says nothing about risk: two deals with the same cash-on-cash can have very different vacancy exposure, tenant quality, or deferred maintenance. Use it to filter the obviously weak deals quickly, then move the survivors into a full multi-year model with IRR and equity multiple before you commit.
Ways to improve a property's cash-on-cash
If a deal's cash-on-cash is close but not quite there, several levers can move it. On the income side: raising below-market rents to market, adding ancillary income (pet rent, parking, laundry, storage), or reducing vacancy through better tenant retention. On the expense side: appealing an over-assessed property tax bill, shopping insurance, self-managing to cut the management fee, or improving efficiency to lower utilities you cover. On the capital side: negotiating a lower purchase price or better loan terms directly shrinks the denominator or the debt service. Be careful not to 'improve' the number by simply dropping realistic reserves — that flatters the spreadsheet while leaving the property exposed. Genuine improvements raise actual cash flow or lower actual cost; accounting tricks just hide risk.
Frequently asked questions
What's the cash-on-cash formula?
Annual pre-tax cash flow ÷ total cash invested × 100.
Does it include the mortgage?
Yes — cash flow is after the full mortgage payment (principal and interest), and cash invested includes your down payment but not the loan itself.
Is cash-on-cash return before or after taxes?
The standard version is pre-tax, which keeps deals comparable. You can compute an after-tax version, and because depreciation often shelters rental cash flow, the after-tax figure can be higher than pre-tax in the early years.
Should I subtract depreciation from cash flow?
No. Depreciation is a non-cash deduction — it lowers taxable income but never leaves your bank account, so it has no place in a cash-flow (cash-on-cash) calculation.
Why did my cash-on-cash return jump after a refinance?
A cash-out refinance returns some of your invested capital, shrinking the denominator. Dividing cash flow by a smaller cash-invested figure raises the reported return, even though the property's economics haven't changed.
What's a realistic year-one versus stabilized cash-on-cash?
Year one is often lower because of upfront closing costs, repairs, and lease-up vacancy. A stabilized year removes those one-time drags, so quote which one you mean when comparing deals.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.