What Is a Good Cash on Cash Return?

What is a good cash on cash return is not a single national number. It is the annual pre-tax cash left after operating expenses and debt service, divided by the cash you actually left in the deal—down payment, closing costs, and prepaid reserves you cannot spend. In a mid-single-digit mortgage-rate tape, a boring long-term rental that clears 6–10% on cash may be a solid business. The same 6% on a furniture-heavy short-term rental with a 50-hour-a-month job attached is a hobby. Value-add that shows 18% in year two and −4% in year one is a project, not a yield.

The Federal Reserve’s H.15 selected interest rates and the Freddie Mac Primary Mortgage Market Survey are the public series people use to describe the rate tape. They do not tell you what your house should earn. They tell you why cash-on-cash compressed versus a 3% rate decade: the same rent supports less debt service, so either prices adjust, cash-on-cash falls, or both.

What Is a Good Cash on Cash Return by Hold Strategy

Use bands as conversation starters, not as promises or as loan overlays. DSCR and commercial underwriting look at coverage and LTV, not at whether you hit a forum’s favorite percentage.

Stabilized long-term rental (1–4 unit).
In many markets, investors now underwrite something in the mid-single to low-double digits on actual cash in, after a conservative vacancy (5–8%) and a real maintenance reserve. A 4% cash-on-cash on a cheap fixed loan in a strong location can still be rational if you are buying remaining loan term and rent growth. A 4% cash-on-cash on a thin IO teaser with a 5-year reset is not the same 4%.

Value-add / lease-up.
Year-one cash-on-cash can be low or negative by design. The “good” number is the stabilized year plus the equity you create, after you count the extra cash you will put in for turns and vacancy. If the deal only works if every unit hits asking rent in 90 days, you do not have a yield. You have a schedule.

Short-term rental.
Gross looks high; net often does not. A “good” STR cash-on-cash should be calculated after furniture, platform fees, cleaning, utilities, a furniture reserve, and a vacancy/occupancy stress—not after a January peak month annualized. Many operators want a clear premium over the LTR number on the same house to pay for labor and regulatory risk. If STR cash-on-cash equals LTR after an honest stress, operate LTR.

Small commercial / small multifamily.
Compare cash-on-cash to the same-risk bond-plus-illiquidity idea, and to cap rate versus DSCR. A 5% cash-on-cash on a NNN credit tenant with 12 years of term can be better business than 12% on a thin retail strip you will babysit. Five-to-eight-unit buildings are operations-heavy; they are typically an experienced-investor lane, not a first-cash-on-cash trophy.

What Moves the Number (More Than the Headline Rate)

Down payment. More cash in lowers cash-on-cash if the property still cash-flows, because you used expensive-feeling cash to buy a smaller payment. That can still be the right DSCR move. How to increase DSCR and cash-on-cash often trade off.

Rate and points. A higher note rate crushes cash-on-cash faster than it crushes cap rate, because cap rate ignores financing. Points spent to buy the rate down can raise cash-on-cash if you count points as cash in (you should).

IO versus amortizing. Interest-only raises near-term cash-on-cash and postpones principal. Measure both the IO year and the amortizing year. Interest-only DSCR and amortization vs IO are the product articles.

Taxes and insurance resets. A homestead bill or a seller’s old premium is not your PITIA. Escrow shortages in month eight are how a 9% cash-on-cash becomes 5%.

Reserves you must hold. If a program parks six months of PITIA you cannot touch, that cash is part of the denominator until it is released. Investment property reserves belong in the yield.

Your time. Cash-on-cash ignores labor. If you are the cleaner, add a wage. Otherwise you will call a job a return.

How to Calculate It So You Can Compare Files

Cash-on-cash = Annual pre-tax cash flow after debt service ÷ Total cash invested

Annual cash flow = EGI − operating expenses − replacement reserve − PITIA (or commercial debt service). Do not add depreciation back; that is a tax item, not cash. Do not annualize two good months.

Total cash invested = down payment + closing costs + initial reserves and furniture that are not financed − credits you actually received.

Run a second column at +1% on the rate and −10% on rent. If the “good” return dies in that column, it was not good. It was a point estimate.

The 1 percent rule is a faster, worse screen. Use it to throw junk out. Use cash-on-cash (and DSCR) to decide.

When a “Low” Number Is Still a Buy

• You are pairing a modest cash-on-cash with a loan you could not get at this leverage later, and rent is catching the payment.
• You are buying below replacement cost with a real capex plan, not a wish.
• You are consolidating a 1031 clock into an asset you will actually hold. See when to sell.

When a “high” number is still a pass: seller finance that balloons in 24 months, STR in a city that is writing a ban, or a 5–8 unit “deal” offered to a first-time operator as if doors were the same as a duplex.

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Frequently Asked Questions

Is 10% a good cash-on-cash return on a rental?

It can be, on a stabilized LTR with honest expenses and a payment that still works if rates or taxes move a bit. It is not automatically good on a hospitality asset or a value-add that ignored vacancy. Compare it to the risk and to your after-tax cost of the cash.

Should I include closing costs in the denominator?

Yes. Cash-on-cash is a return on cash you cannot spend elsewhere. Points, title, and prepaid insurance are cash. Ignoring them inflates the yield so every deal looks like a win.

Does a higher DSCR mean a higher cash-on-cash return?

Not necessarily. A large down payment can raise DSCR and lower cash-on-cash. A thin IO loan can raise cash-on-cash and leave a weaker long-term DSCR. They are related through the payment; they are not the same metric.

How does interest-only change a good cash-on-cash number?

It usually raises the year-one figure. Quote the amortizing year next to it, and the recast risk if IO expires. A “good” IO yield that becomes a negative amortizing yield is a timing trick.

Can I use cash-on-cash to size a DSCR or commercial loan?

No. Those files size from rent versus PITIA or from NOI versus debt service, plus LTV. Cash-on-cash is your equity yield after that payment exists. Do not ask a financing review to target a forum percentage.