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What does the money you actually put in earn? Enter your cash invested and your annual cash flow after debt service to get cash-on-cash return.
Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested. Cash flow is NOI minus debt service. Cash invested is everything that left your account: down payment, closing costs, and rehab. On the $425,000 duplex with $26,220 of NOI and a $340,000 loan at 7% costing $27,144 a year, cash flow is negative $924. Against $85,000 down plus roughly $12,000 of closing costs, that is negative 0.9% on $97,000 of cash.
The gap between cap rate and cash-on-cash is the loan. Cap rate measures the building at 6.2%. Cash-on-cash measures your position after the lender takes their share, and at a 7% borrowing rate that turns a positive yield into a negative one. The distance between those two numbers is the entire argument over whether debt helps or hurts a given purchase.
Negative leverage shows up the moment the loan rate passes the cap rate. At 6.2% against 7% borrowing, each additional dollar of debt lowers cash-on-cash return, which inverts the usual intuition that a bigger loan magnifies returns.
The same duplex at 50% down produces positive cash flow. A $212,500 loan at 7% runs about $1,414 a month, or $16,968 a year, leaving $9,252 of cash flow on roughly $224,500 of cash: 4.1%. Less leverage, more return, because the leverage was working against the deal.
Cash-on-cash counts only cash. Principal paydown, appreciation, and the depreciation deduction are all invisible to it, so a deal can post a weak figure here and still build equity. Taxes are excluded too, which is why the metric is pre-tax by convention.
The denominator is cash invested rather than price, which makes this the one return metric a refinance changes. Pulling cash out shrinks the denominator and can raise the percentage even while monthly cash flow falls.
Annual Pre-Tax Cash Flow ÷ Total Cash Invested. Cash flow is NOI minus annual debt service, and cash invested is down payment plus closing costs plus rehab. Financed deals and cash deals both use the same formula; only the inputs differ.
Every dollar out of pocket to acquire and stabilize the property: down payment, closing costs, inspection and appraisal fees, and rehab spending before it produces income. Leaving closing costs out overstates the return, and on this duplex it would move the figure by about 12%.
Cap rate divides NOI by price and ignores the loan. Cash-on-cash divides after-debt cash flow by the cash you invested. On this duplex the same deal reads 6.2% one way and negative 0.9% the other, and both numbers are correct.
Yes, whenever debt service exceeds NOI. This duplex at 80% leverage and a 7% rate returns negative 0.9%, meaning the owner funds $924 a year to hold it.
No. It measures cash produced in a single year, so appreciation, principal paydown, and tax benefits sit outside it. IRR is the metric that folds those into a return across a holding period.
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