Cash-on-cash returns are the return on investment (ROI) you can expect to earn on just the cash you invest. It takes both the interest payments you’ll be making and the lower cash required into consideration.
Ultimately, it’s the amount of money you can expect to earn back every year in cash flow, as a percentage of the total cash you invested in the project. If you invested $20,000 toward the down payment and closing costs, and you earn $2,000 a year in cash flow, that’s a 10% cash-on-cash return.
It’s a great way to compare the potential return from a rental property to returns on any other investment, such as stocks or bonds, which is why we focus on it in our rental property ROI calculator.