Cash flow and cash-on-cash return

The Rental Property Calculator reports three headline figures for a deal. Cap rate describes the property on its own; the other two, monthly cash flow and cash-on-cash return, describe what happens once a loan is attached. This guide walks through how those two are computed: the definition of cash flow, how the mortgage payment inside it is produced, what counts as cash invested, and how the annual ratio is formed. Every figure below is computed at build time by the same engine that runs the calculators, so the examples cannot drift from the tool. Cap rate and NOI have their own guide: NOI and cap rate, explained.

Monthly cash flow: the definition

Cash flow is defined as effective rent − operating expenses − mortgage payment, measured monthly. Effective rent is the monthly rent × (1 − vacancy%): vacancy is a steady haircut on every month, not a count of empty months. Operating expenses are the monthly costs of running the property, and they exclude mortgage principal and interest by industry convention, because the mortgage is subtracted on its own line. The three subtractions happen in that order and nothing else enters.

The reference deal makes the arithmetic concrete. The inputs are a $220,000 purchase with 20% down ($44,000), a 7% loan over 30 years, $2,200 of monthly rent, a 5% vacancy allowance, $650 of monthly operating expenses, $5,000 of closing costs, and $3,000 of initial rehab. Effective rent is $2,090.00. Subtracting $650 of operating expenses and the $1,170.93 mortgage payment leaves $269.07 of monthly cash flow, or $3,228.81 a year. The vacancy input alone is worth seeing in isolation: with every other input unchanged and vacancy set to 0%, effective rent becomes $2,200.00 and cash flow rises to $379.07 a month. The model does not tell you what vacancy to enter; it shows what the figure you enter does.

The mortgage payment: how PMT works

The payment inside the cash-flow line is the standard amortized-loan formula with monthly compounding. The loan is the purchase price less the down payment. The annual rate is divided by 12 to get a monthly rate r, and the term in years is multiplied by 12 to get the number of payments n. The payment is then loan × r(1 + r)ⁿ ÷ ((1 + r)ⁿ − 1): a level amount that, paid n times, exactly retires the loan with interest charged on the remaining balance each month. On the reference deal the loan is $176,000, the monthly rate is 0.005833 (7% ÷ 12), the payment count is 360, and the formula produces $1,170.93.

Two edge cases are handled explicitly. At a 0% rate the formula would divide by zero, so the engine divides the principal evenly instead: $176,000 over 360 payments is $488.89 a month, and with that payment the reference deal's cash flow becomes $951.11. And when the down payment equals the purchase price there is no loan, so the payment is $0 and cash flow equals effective rent less operating expenses, $1,440.00 on these inputs. The rate, the term, and the loan size are the only things the payment depends on; rent and expenses never touch it.

Cash invested: the denominator

Cash invested is down payment + closing costs + initial rehab. It is the cash that left your pocket to acquire and ready the property, and it is deliberately not the purchase price: the loan covers the rest, and the loan's cost is already charged inside cash flow through the payment. On the reference deal that is $44,000 + $5,000 + $3,000 = $52,000. Closing and rehab are optional inputs that count as zero when left blank, but the total must be positive: a ratio over zero dollars has no meaning, so the engine refuses a deal with no down payment, closing costs, or rehab. Its message reads "Enter a down payment (and any closing or rehab costs)." The standalone Cash-on-Cash Return Calculator applies the same rule to its cash-invested field; its message is "The cash invested must be greater than 0."

Annual cash-on-cash return

Cash-on-cash return is annual cash flow ÷ cash invested, expressed as a percent. The annual figure is the monthly cash flow × 12, so the ratio is a yearly rate on the cash invested, before taxes. On the reference deal, $3,228.81 ÷ $52,000 gives 6.21%. The standalone calculator, given those two figures directly, returns the same 6.21%: it is the same division, just without the deal analysis in front of it.

A misreading the standalone tool cannot detect is entering a monthly cash flow where the annual one belongs. With $4,800 of annual cash flow on $60,000 invested the ratio is 8%; entering the monthly $400 instead reports 0.67%, one-twelfth of the real figure. Nothing in the arithmetic can flag the mistake, because a small annual cash flow is a perfectly valid input. The field label says annual, and that is the figure to use.

Same property, different financing

The clearest way to see what financing does is to hold the property fixed and vary only the loan. Every row below uses the reference deal's price, rent, vacancy, operating expenses, closing costs, and rehab; only the down payment, rate, and term change. The rates are illustrative inputs, not quotes.

Read the table column by column. The cap rate is 7.85% on every row, because neither NOI nor the purchase price contains a financing term. The payment column moves with the rate and the term: at 20% down, going from the 5% input to the 9% input raises the payment from $944.81 to $1,416.14, and cash flow falls from $495.19 to $23.86 on the same rent and expenses. Shortening the term to 15 years at 7% raises the payment to $1,581.94 and pushes cash flow to -$141.94, a negative figure that the model reports as -3.28% cash-on-cash. The 10% down row at 9% is negative as well, at -$153.15 a month.

The down-payment comparison is the one worth studying, because it does not go one way. At the 5% input, 10% down produces 15.08% against 11.43% at 20% down: borrowing more raised the ratio. At the 7% input the same move lowers it, 4.91% against 6.21%. The mechanism is that a larger loan shrinks the denominator and raises the payment at once, and the ratio follows whichever change is larger for those inputs. The 35% down row (6.9%) and the all-cash row (7.58%) continue the 7% sequence. There is no rule here; there is only the division, run on the inputs.

Why financing moves cash-on-cash but not cap rate

The two ratios are built from different parts of the same deal. NOI is (effective rent − operating expenses) × 12, and cap rate divides it by the property value; the loan appears in neither the numerator nor the denominator, so cap rate is the same for an all-cash buyer and a heavily financed one. Cash flow subtracts the mortgage payment, and cash invested is the down payment plus closing and rehab rather than the price, so the loan sits in both halves of cash-on-cash. The all-cash row makes the relationship visible: with the full $220,000 paid in cash, closing and rehab still in the denominator, cash-on-cash is 7.58%, just under the 7.85% cap rate. Remove the closing costs and rehab as well and cash invested equals the price, so cash-on-cash becomes exactly 7.85%, the cap rate. Every financed row differs from the cap rate because of the loan; the all-cash row in the table differs only by the closing costs and rehab sitting in its denominator.

This is why the two numbers answer different questions. Cap rate lets you compare properties regardless of how each buyer would finance them. Cash-on-cash measures the pre-tax cash yield on the cash a particular buyer actually committed, under a particular loan. Reading one as a substitute for the other is another misreading, and the table shows how far apart they can sit on a single property.

The double-counting error

Because the mortgage is subtracted on its own line, it must not also be inside operating expenses. The error is easy to make when a monthly budget already includes the payment. Take the reference deal and add its $1,170.93 payment into the operating-expense field as well: cash flow drops to -$901.86 a month, cash-on-cash to -20.81%, and the cap rate to 1.47%. The cap-rate collapse is the tell, since a property's cap rate should not move when its financing is rearranged. Operating expenses are property tax, insurance, maintenance, management, and similar running costs, entered monthly; the loan belongs to the financing inputs.

Where the model stops

These are screening figures, not underwriting. Cash flow and cash-on-cash as computed here do not include income taxes, depreciation deductions, appreciation on rentals, principal paydown as a return component, PMI, financing points, rent growth on investment properties, or market cycles. The model does not estimate how large any of those would be; it simply leaves them out, which means the cash-on-cash figure is the pre-tax cash slice of a return and nothing more. The payment is level for the whole term, vacancy is a constant percentage, and operating expenses are a single monthly figure that never changes. A deal whose shape depends on something the model omits has to be evaluated with other tools and with qualified professionals.

Read the output as a description of the deal's cash mechanics under the inputs you entered. Positive cash flow means effective rent covers operating expenses and the payment with margin; negative cash flow means it does not, and the model reports the shortfall rather than hiding it. Changing an input and re-running the analysis shows which assumption the result depends on. The full set of calculators and guides is listed on the guides page.

Frequently asked questions

Not financial advice: a general educational explanation of a screening model that excludes taxes, appreciation, and loan paydown. Verify any deal with your own due diligence and qualified professionals. See the methodology page.