Cash-on-cash return tells you what annual cash income you earn relative to the actual cash you put into a deal. It's the number most rental investors lead with, because it reflects leverage — unlike cap rate, it accounts for your mortgage.
Say you buy a $250,000 rental, put 20% down, and it rents for $2,200/month.
| Down payment (20%) | $50,000 |
| Closing costs + rehab | $10,000 |
| Total cash invested | $60,000 |
| Net operating income (after expenses) | $16,950/yr |
| Mortgage (P&I, 6.5% / 30yr) | −$15,170/yr |
| Annual cash flow | $1,780/yr |
Cash-on-cash = $1,780 ÷ $60,000 = ≈ 3.0%. Drop the rate or raise the rent and that number moves quickly — which is exactly why you model it before making an offer.
It depends on the market and your goals, but many buy-and-hold investors look for somewhere around 8–12%, and treat anything negative as a red flag unless they're betting on appreciation. In low-cap-rate metros, investors accept less; in cash-flow markets they want more. Compare it against simply leaving the money in an index fund or a high-yield account.