Formula
Debt service is included here, and the denominator is cash invested rather than the full price:
return = (rent − operating costs − debt service) / cash invested
All four amounts are annual except cash invested, which is the cash paid in at the start. Currency changes the symbol only.
Assumptions
- Cash invested is the down payment and other cash in, not the purchase price.
- Debt service is the year's loan payments.
- A negative cash flow produces a negative return.
Worked example
Cash invested of $60,000.00, with $6,000.00 left after rent, operating costs, and debt service, is a 10.00% cash-on-cash return.
Input definitions
- Cash invested
- Money you paid in. It is smaller than the purchase price when you use a loan.
- Annual debt service
- Principal and interest you pay on the loan during the year.
Limitations
This does not include selling the property, tax benefits, or a change in value. Rent-versus-buy stays unpublished because the mortgage tools already estimate the loan.
Questions
How is this different from the cap rate?
Cap rate ignores the loan and divides by the property value. Cash-on-cash subtracts the loan payments and divides by the cash you put in.
Can debt service be zero?
Yes. The return is then the cash flow after operating costs, divided by the cash invested.