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.
Frequently asked questions
Do closing costs count as cash invested?
Yes — they are cash you paid out of pocket and belong in the denominator.
What about renovation costs before the first tenant?
Yes, pre-rental rehab costs should be included in cash invested.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.