ROI vs Cash-on-Cash Return
Cash-on-cash return measures only the pre-tax cash a rental pays you in a year, divided by the cash you invested. Return on investment (ROI) is broader: it can add principal paid down and appreciation, so it measures total gain. ROI is usually higher on paper, but much of it is unrealised until you sell or refinance, while cash-on-cash is money you can spend.
ROI vs Cash-on-cash side by side
| ROI | Cash-on-cash | |
|---|---|---|
| Counts | All gains you choose to include: cash flow, loan paydown, appreciation, sale proceeds | Annual pre-tax cash flow only |
| Denominator | Varies - cash invested or total cost; always state it | Cash invested (down payment, closing costs, upfront repairs) |
| Includes appreciation? | Often | No |
| Spendable now? | Partly - paydown and appreciation are unrealised | Yes |
| Time frame | A year or the whole holding period | One year |
| Standard definition? | No - definitions vary | Fairly standard |
Full definitions: Return on Investment, Cash-on-Cash Return.
When to use each
Use cash-on-cash return to judge whether a rental supports itself and pays you a reasonable income on your cash - especially if you rely on that income.
Use ROI, carefully defined, to compare total outcomes - for example a rental against a renovation project or another investment over the same period. Because people define it differently, check what any ROI figure includes before comparing it with another.
Why the numbers drift apart
Every mortgage payment includes principal, which reduces cash flow but builds equity. Appreciation, if it happens, adds wealth without adding cash. ROI picks up both; cash-on-cash ignores both. In a flat market, the gap narrows to the loan paydown.
Cash-on-cash return and leverage
Cash-on-cash return is the yearly cash flow divided by the cash you put in. The down payment changes both sides, so the same property can return very different rates.
- Cash-on-cash return
- 3.48%
- First-year, before tax
- Cash invested
- $88,000
- Down payment and closing costs
- Yearly cash flow
- $3,064
Show the numbers as a table
| Down payment | Cash invested | Cash flow / year | Cash-on-cash | Cap rate |
|---|---|---|---|---|
| 20% | $72,000 | $1,819 | 2.53% | 7.33% |
| 25% | $88,000 | $3,064 | 3.48% | 7.33% |
| 35% | $120,000 | $5,555 | 4.63% | 7.33% |
| 50% | $168,000 | $9,291 | 5.53% | 7.33% |
| 100% | $328,000 | $21,744 | 6.63% | 7.33% |
Formula
Cash-on-cash = Annual pre-tax cash flow ÷ Total cash invested × 100Assumptions
- 30-year fixed loan, no points; one unit with no other income, HOA or utilities.
- Vacancy is taken off gross rent; management, maintenance and the capital-expenditure reserve are a share of collected rent.
- The capital-expenditure reserve sits below NOI: it is cash set aside, not an operating expense.
- Income taxes, depreciation and appreciation are left out.
Worked example
ROI and cash-on-cash return on one rental, first year
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Price and down payment
- $300,000 with 25% down ($75,000)
- Closing costs
- $9,000
- Loan
- $225,000 at 7.00%, 30 years
- Net operating income
- $24,000 a year
- Assumed appreciation (hypothetical)
- 3% in year one
| Step | Calculation | Result |
|---|---|---|
| 1. Cash invested | $75,000 + $9,000 | $84,000 |
| 2. Cash flow | $24,000 − $17,963 debt service | $6,037 |
| 3. Cash-on-cash return | $6,037 ÷ $84,000 × 100 | 7.19% |
| 4. Principal paid down in year one | $225,000 − balance after 12 payments | $2,286 |
| 5. Total return (cash flow + paydown + appreciation) | $6,037 + $2,286 + $9,000 | $17,322 |
| 6. ROI on cash invested | $17,322 ÷ $84,000 × 100 | 20.62% |
Cash-on-cash vs ROI: 7.19% vs 20.62%. Only $6,037 arrives as spendable cash, a 7.19% cash-on-cash return. Counting the loan paydown and the assumed appreciation, the year's ROI is 20.62% - but most of that is paper gain you cannot spend until you sell or refinance, and the appreciation may not happen.
What this calculation leaves out
- Appreciation is a hypothetical input, not a forecast; at 0% the ROI falls to the cash flow plus paydown.
- ROI here ignores selling costs and taxes, which reduce the gain you could actually realise.
- Some people define ROI on the full price rather than cash invested; always state the denominator.
Common misconceptions
- A high ROI means the property pays me well. It may be mostly appreciation you cannot spend.
- ROI has one formula. It does not; always state what is in the numerator and the denominator.
- Appreciation is guaranteed. Treat it as a scenario, and check the deal still works at zero.
Frequently asked questions
What is the difference between ROI and cash-on-cash return?
Cash-on-cash counts only the cash a property pays you in a year; ROI can also count loan paydown, appreciation and sale proceeds. Cash-on-cash is a subset of a total return.
Which return should I use to compare rentals?
Use cash-on-cash return and cap rate for like-for-like comparisons, and an ROI or IRR over your full holding period when timing and appreciation matter.
Is a 10% cash-on-cash return good?
It can be, but there is no universal target. It depends on your alternatives, the risk of the property and how much of the return depends on optimistic rent or expenses.
Calculators and guides
Recommended next step
Project cash flow, paydown and appreciation separately so you can see what is spendable.
See both returns for your deal →Sources and review
No regulator defines these terms; the page follows common industry practice and labels rules of thumb as such.
Where this applies: Not regulated. Investment ratios are industry conventions; lenders and analysts may define the inputs differently, so always check how a figure was calculated.
Last reviewed: · Updated:
Worked examples use illustrative round numbers, not current market data. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
General educational information, not financial, legal, tax or real estate advice. Rules vary by loan program, transaction and location - verify important decisions with qualified professionals.