Real Estate Tax Calc
The common range
Many buy-and-hold investors target a cash-on-cash return of 8–12%. Below that, the deal leans on appreciation; above it, you're getting strong current cash flow.
It depends on strategy
In high-appreciation markets, investors often accept lower cash-on-cash in exchange for expected equity growth. In cash-flow markets, they demand more. There's no universal 'good' number — only good relative to your goals and risk.
Remember it's pre-tax
Cash-on-cash return is a pre-tax metric. Depreciation can meaningfully improve your after-tax return, so a modest cash-on-cash figure may look better once the tax shelter is counted.
Benchmark against your alternatives
A cash-on-cash return is only 'good' relative to what else you could do with the money. Compare it to the risk-free rate — what a Treasury bill or high-yield savings account pays with no work and no risk. If safe cash is yielding 4–5%, a rental's cash-on-cash needs to clear that by a meaningful margin to compensate for illiquidity, management effort, tenant risk, and the possibility of costly repairs. Compare it to a dividend stock or REIT, which offers real-estate exposure with far less hassle. The premium a direct rental should earn over these passive alternatives is your reward for the extra work and risk — and it is also the appreciation and loan paydown you get on top of cash flow that often justify accepting a lower current yield than a bond.
The number is only as honest as its assumptions
A '12% cash-on-cash' means nothing until you know how it was computed. Did the seller or agent assume zero vacancy? Did they leave out property management because you will self-manage — a real cost of your time? Did they omit capital-expenditure reserves for the roof, HVAC, and turnovers that will absolutely come due? Did they use projected pro-forma rents instead of current lease amounts? Each omission inflates the headline. A conservative 7% that fully loads vacancy, reserves, and management is worth more than an aggressive 12% that assumes perfection. Always rebuild the number with your own realistic assumptions before treating it as good or bad, and make sure any two deals you compare were calculated the same way.
How market type reshapes the target
The 'right' cash-on-cash splits sharply by market. In cash-flow markets — much of the Midwest and South, lower price points — investors can find and should demand higher cash-on-cash, often 8–12% or more, because appreciation is modest and current income is the main return. In appreciation markets — coastal metros, high-growth cities — prices are high relative to rents, so cash-on-cash is thin (sometimes 2–4%, occasionally negative early), and investors accept it in exchange for expected price growth and strong long-term rent increases. Neither strategy is wrong, but applying a cash-flow market's benchmark to an appreciation market (or vice versa) leads you to reject good deals or overpay for bad ones. Judge the number against the strategy the market actually rewards.
After-tax can beat pre-tax in early years
Rental real estate is unusual: its after-tax return can exceed its pre-tax return in the early years of ownership. That is because depreciation — a non-cash deduction of the building's value over 27.5 years — often shelters much or all of the cash flow from income tax, and can even create a paper loss that offsets other income (subject to the passive activity rules and the $25,000 special allowance for active participants under the income phase-out). So a property showing a pre-tax cash-on-cash of 6% might deliver an effective after-tax yield closer to 7–8% for an investor who can use the depreciation. This tax advantage is a core reason experienced investors accept cash-on-cash figures that would look unremarkable for a fully taxable investment like a bond.
Year-one vs. stabilized returns
Be clear about which year a cash-on-cash figure describes. Year one is usually depressed: you paid closing costs and upfront repairs that swell your cash invested, and you may have lost weeks to lease-up vacancy. A stabilized year — once the property is rented, the make-ready is done, and rents have reached market — reflects the property's true ongoing yield and is typically higher. Comparing one property's year-one number to another's stabilized number is apples to oranges. When you set a target, decide whether you are judging the entry-year return or the steady-state return, and hold every deal to the same standard. Many investors underwrite to the stabilized figure while keeping enough reserves to survive the lower year-one cash flow.
Don't chase yield off a cliff
A very high advertised cash-on-cash is often a warning, not a prize. Returns above roughly 12–15% frequently come with hidden risk: a rough neighborhood with high turnover and eviction costs, an aging building with deferred capital expenses about to hit, tenant instability, or optimistic rents that will not hold. The highest-yielding markets on a spreadsheet are often the hardest to actually operate. A durable 8% from a stable property in a growing area can build more wealth over a decade than a fragile 14% that collapses the first time a furnace dies or a tenant stops paying. Weigh the return against the risk and the effort required to realize it — and be skeptical of any number that looks too good.
Targets vary by property type
A 'good' cash-on-cash shifts with the asset class. A stable, low-maintenance single-family rental in a decent area might reasonably yield 5–8% while offering appreciation and easy financing. Small multifamily often targets a bit higher, 7–10%, reflecting more management and turnover. Short-term / vacation rentals can post double-digit cash-on-cash but with far more volatility, seasonality, higher operating costs, and regulatory risk — the headline number carries more uncertainty. Commercial and triple-net deals may show modest cash-on-cash but with long leases and tenants covering expenses, trading yield for stability. Comparing a short-term rental's 14% to a triple-net 6% as if they were the same is a mistake; they carry entirely different risk and effort profiles. Judge the return against the norms — and the headaches — of that specific property type.
Rising rates reset the benchmark
Return targets are not fixed in stone; they move with the broader cost of money. When interest rates and risk-free yields are low, investors accept lower cash-on-cash because the alternatives pay little and cheap debt makes deals pencil. When rates rise — as they did sharply in recent years — two things happen: safe assets like Treasuries suddenly pay more, raising the bar a rental must clear to be worth the trouble; and higher mortgage rates directly compress the cash flow that produces cash-on-cash. So a 6% cash-on-cash that looked attractive against 1% Treasuries looks thin against 5% ones. Always judge a target against the current rate environment, not a benchmark you memorized in a different cycle. A good return is one that beats today's safe alternatives by a margin that pays you for the risk and work.
Set your own hurdle rate
Rather than adopting a generic '8–12%,' define a personal hurdle rate — the minimum return below which you will not deploy capital. Build it from the ground up: start with the risk-free rate, add a premium for illiquidity, add a premium for the specific property's risk (location, condition, tenant profile), and add a premium for your time if you self-manage. If that sums to, say, 9%, then a deal must project a cash-on-cash (or, better, a total return) above 9% to earn your money. This turns a vague benchmark into a disciplined filter tailored to your situation and the current market. It also protects you from two opposite errors: chasing risky high-yield deals that do not actually clear your risk-adjusted bar, and overpaying for trophy properties whose returns fall below what your capital could safely earn elsewhere.
Improving a deal to reach your target
If a property falls just short of your target, several levers can raise its cash-on-cash before you walk away. On the income side: bring below-market rents to market, add ancillary income (pet rent, parking, storage, laundry), and cut vacancy through better retention. On the expense side: appeal an over-assessed property tax bill, reshop insurance, self-manage to save the management fee, or improve efficiency to trim owner-paid utilities. On the capital side: negotiate a lower purchase price or better loan terms to shrink the denominator and the debt service. The one thing you must not do is manufacture a better number by dropping realistic vacancy or reserve assumptions — that flatters the spreadsheet while leaving the property exposed. Genuine improvements raise actual cash flow or lower actual cost; accounting shortcuts only hide risk and set up an unpleasant surprise the first time reality intrudes.
Frequently asked questions
Is 8% a good cash-on-cash return?
It's within the common 8–12% target range, but whether it's 'good' depends on your market and whether you're buying for cash flow or appreciation.
Is cash-on-cash return before or after tax?
It's a pre-tax metric. Depreciation can improve your actual after-tax return, sometimes pushing the after-tax yield above the pre-tax figure in early years.
What cash-on-cash should I expect in an appreciation market?
Often just 2–4% (occasionally negative in year one), because high prices relative to rents compress current cash flow. Investors accept it in exchange for expected price growth and rent increases, so judge it against a total-return, not cash-flow, strategy.
Is a higher cash-on-cash always better?
No. Returns above roughly 12–15% often signal hidden risk — high turnover, deferred capital expenses, tenant instability, or optimistic rents. Weigh the return against the risk and effort, and be skeptical of numbers that look too good.
How do I compare a rental's cash-on-cash to other investments?
Benchmark it against the risk-free rate (Treasuries, high-yield savings) and against REITs or dividend stocks. A direct rental should pay a premium over those passive options to compensate for its illiquidity, management effort, and risk — plus you get appreciation and loan paydown on top.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.