Real Estate Tax Calc
More than the down payment
Cash-on-cash return = annual pre-tax cash flow ÷ total cash invested. A common mistake is using only the down payment in the denominator. Cash invested should include: down payment, closing costs (lender fees, title, escrow), pre-rent renovation or rehab costs, and any initial reserves required by the lender or needed to stabilize the property.
What to include vs. exclude
Include everything you paid out-of-pocket before the first tenant arrives. Exclude the loan balance itself — that's not your cash. Any rental income received during a pre-closing rehab period can offset cash going in, reducing the effective cash invested.
Why precision matters
Underestimating cash invested inflates the return and makes a mediocre deal look excellent. A $50,000 down payment with $8,000 in closing costs and $12,000 in repairs is $70,000 of actual cash invested — a 40% difference from using the down payment alone. Small denominator errors compound across a portfolio.
The complete cash-invested checklist
Walk through every dollar that leaves your pocket to acquire and stabilize the property, not just the wire you send at closing. A thorough denominator usually includes: the down payment; lender closing costs (origination, underwriting, and any discount points you paid to buy down the rate); third-party closing costs (title insurance, escrow/settlement fees, recording, transfer taxes); due-diligence costs (appraisal, home and pest inspection, survey); prepaid items funded at closing (the initial escrow deposit for property taxes and insurance, and prepaid interest); pre-rental rehab and make-ready costs; and any initial capital reserve the lender requires or you set aside to carry the property until it stabilizes. For a short-term or furnished rental, the cost of furnishings, linens, and setup belongs here too.
A fully worked example
Say you buy a $250,000 rental with 25% down. Your down payment is $62,500. At closing you pay $3,500 in lender fees, $1,000 in title and escrow, $600 for appraisal and inspection, and fund a $2,400 tax-and-insurance escrow — $7,500 in closing and prepaid costs. Before the first tenant you spend $10,000 on paint, flooring, and a new water heater. The seller gives you a $2,000 credit toward closing, which reduces your out-of-pocket by that amount.
Total cash invested = $62,500 + $7,500 + $10,000 − $2,000 = $78,000. If the property throws off $7,800 of annual pre-tax cash flow, cash-on-cash return is $7,800 ÷ $78,000 = 10.0%. Had you divided by the down payment alone ($62,500), you'd have overstated the return at 12.5% — a full 2.5 points of phantom performance created purely by a sloppy denominator.
What to exclude
Cash invested measures your money at work, so leave out anything that isn't an out-of-pocket outlay. Exclude the loan principal — the bank's money is not your cash. Exclude appreciation and any increase in equity from paydown; those are returns, not invested capital. Exclude sweat equity valued at what a contractor would have charged — only the actual dollars you spent on materials and paid labor count. And don't double-count ongoing reserves funded out of rental income after the property is operating; those are operating cash flows, not part of your initial basis in the deal.
Refinances and the BRRRR effect
Cash invested isn't frozen forever. In a BRRRR (buy, rehab, rent, refinance, repeat) strategy, a cash-out refinance returns some or all of your original capital. Once you pull, say, $60,000 back out of a deal in which you'd invested $78,000, your remaining cash left in the deal is only $18,000. Recomputing cash-on-cash on the post-refinance capital ($18,000) shows a dramatically higher return — and if you recover 100% of your cash, the return becomes mathematically infinite. Investors track both the original cash-on-cash (how the deal performed on day one) and the current cash-on-cash (how the capital still tied up is performing) because they answer different questions.
Financed vs. all-cash purchases
If you buy without a mortgage, cash invested balloons to the full purchase price plus closing costs and rehab — there's no leverage shrinking the denominator. That's why an all-cash deal typically shows a much lower cash-on-cash return than the same property bought with 20–25% down, even though the all-cash buyer keeps every dollar of what would have been the mortgage payment. Comparing the two on cash-on-cash alone is apples-to-oranges; the leveraged figure reflects the risk and cost of debt that the all-cash figure doesn't carry.
Common mistakes
The recurring errors all shrink or inflate the denominator: using only the down payment; forgetting rehab or furnishing costs; ignoring seller credits and lender rebates that reduce your out-of-pocket; counting the loan amount as if it were your money; and failing to update the denominator after a refinance pulls capital back out. Keep a simple sources-and-uses worksheet for each property so the cash-invested figure is auditable rather than a guess.
House hacks and partial rentals
When you live in part of the property — a duplex where you occupy one side, or a single-family home with a rented basement unit — only the rental share of the cash you invested belongs in a cash-on-cash calculation for the rental portion. If you put $60,000 into a duplex you split 50/50, roughly $30,000 is attributable to the rental unit. The same allocation logic applies to closing costs and rehab: costs that benefit only the rented side are fully counted, costs that benefit only your unit are excluded, and shared costs (a new roof over both units) are split. Owner-occupant financing often means a smaller down payment than a pure investment loan, which shrinks cash invested and can make a house hack's cash-on-cash look strong.
Lender reserve requirements
Many investment-property lenders require you to show reserves — often several months of principal, interest, taxes, and insurance — in the bank at closing. Whether those reserves belong in cash invested depends on how you treat them. Money you must actually set aside and hold to carry the property is arguably part of the capital tied up in the deal; a general liquidity requirement you'd keep anyway is less clearly deal-specific. Be consistent across properties: if you count required operating reserves in one deal's denominator, count them in all of them, so your cash-on-cash figures stay comparable.
Cash invested when you add capital later
The denominator isn't only a day-one number. If you later fund a major capital improvement out of pocket — a $20,000 roof, a full unit renovation between tenants — that new money increases your total cash invested and should be reflected when you recompute the current return. This is the mirror image of the refinance case: a refinance pulls capital out and shrinks the denominator, while an out-of-pocket CapEx event pushes capital in and grows it. Tracking these adjustments over time gives you a true picture of how the capital actually tied up in the property is performing, not just how it looked at purchase.
Cash invested in a BRRRR or value-add deal
In a value-add or BRRRR deal, distinguish total project cost from your cash invested. Total project cost is purchase price plus rehab plus carrying costs; your cash invested is only the slice of that funded with your own money after loans. If you use a rehab loan or line of credit that covers part of the construction, that financed portion is not your cash. Then, when the stabilized property is refinanced based on its higher after-repair value, the cash-out proceeds reduce the capital you still have in the deal. The goal of the strategy is precisely to drive your remaining cash invested toward zero while keeping the asset — which is why current cash-on-cash returns on these deals can look extraordinary.
Keep the definition consistent across your portfolio
Cash-on-cash return is only useful for comparing deals if you compute the denominator the same way every time. If you include closing costs and rehab in one property's cash invested but only the down payment in another's, the two returns aren't comparable and you may rank a worse deal ahead of a better one. Pick a definition — ideally the all-in, out-of-pocket figure — write it down, and apply it uniformly. Consistency is what turns cash-on-cash from a marketing number into a decision tool you can actually trust when choosing between properties.
Cash invested is not the same as tax basis
It is easy to conflate 'cash invested' with your adjusted tax basis, but they answer different questions and rarely match. Cash invested is a return metric — the out-of-pocket money you put to work, used as the denominator of cash-on-cash return. Tax basis is a tax concept — generally your purchase price plus capitalized closing costs and improvements, that determines depreciation and gain on sale. The two diverge in several ways.
First, the loan matters differently. Cash invested excludes borrowed money because it isn't your cash, but your tax basis includes the full purchase price whether you paid cash or financed it — the mortgage is part of your cost. So a leveraged buyer has a small cash-invested figure but a large tax basis. Second, some closing costs that count as cash invested (like prepaid interest or the initial escrow deposit) are not added to tax basis — they are either currently deductible or held in escrow — while others (title, recording, transfer taxes) are capitalized into basis. Third, tax basis is reduced by depreciation each year and adjusted for casualty losses and improvements, whereas cash invested is a snapshot of capital you committed.
The practical takeaway: use cash invested to judge how a deal performs, and use tax basis to compute depreciation and the taxable gain when you sell. Do not plug your cash-on-cash denominator into a depreciation schedule, and do not use your depreciable basis to compute return — they are built for different jobs, and mixing them produces wrong answers in both.
Frequently asked questions
Do closing costs count as cash invested?
Yes — they are cash you paid out of pocket and belong in the denominator.
Is cash invested the same as my tax basis in the property?
No. Cash invested is the out-of-pocket money you put in, used to measure return, and it excludes borrowed funds. Tax basis is your cost for tax purposes — generally the full purchase price (including financed amounts) plus capitalized closing costs and improvements — and it drives depreciation and gain on sale. A leveraged purchase has a small cash-invested figure but a large tax basis, so the two rarely match.
Do lender-required reserves count as cash invested?
It depends on how you treat them. Money you must actually set aside and hold to carry the property is reasonably part of the capital tied up in the deal; a general liquidity requirement you would keep anyway is less clearly deal-specific. Whatever you choose, apply it consistently across every property so your cash-on-cash figures stay comparable.
What about renovation costs before the first tenant?
Yes, pre-rental rehab costs should be included in cash invested.
Do discount points and prepaid escrows count?
Yes. Discount points, prepaid interest, and the initial tax-and-insurance escrow are all cash you funded at closing, so they belong in cash invested.
Should I subtract seller credits?
Yes. A seller credit or lender rebate reduces your out-of-pocket cash, so it lowers the cash-invested denominator.
Does sweat equity count as cash invested?
No. Only the actual dollars you spent on materials and paid labor count. The value of your own unpaid labor is not a cash outlay.
What happens to cash invested after a cash-out refinance?
It drops by the amount of capital you pull back out. Recompute current cash-on-cash on the money still left in the deal; if you recover all of it, the return is effectively infinite.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.