Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested (down payment + closing costs + startup costs), expressed as a percentage. Unlike cap rate, accounts for your actual financing. Seasoned STR investors typically target 8–15%.
Definition
What is Cash-on-Cash Return?
Cash-on-cash return (CoC) measures the annual pre-tax cash flow a property generates as a percentage of the total cash invested — typically the down payment plus closing costs plus initial furnishing and setup costs. Unlike cap rate, cash-on-cash explicitly accounts for financing, making it the most investor-relevant measure of actual return on deployed capital. Two investors buying the same property with different leverage levels will have very different cash-on-cash returns, even though the property's cap rate is identical.
For short-term rentals, cash-on-cash return directly answers the question: "How well is my cash working for me?" It compares what actually lands in your pocket after all expenses and debt service to what you actually put in at the start. A 10% cash-on-cash return means every $100,000 invested generates $10,000 per year in pre-tax cash flow. Seasoned STR investors typically target 8–15% in strong markets, with exceptional deals sometimes reaching 20%+.
Cash-on-cash return does not capture appreciation, equity paydown from the mortgage principal, or tax benefits from depreciation — all meaningful parts of STR total returns. This is why CoC works best alongside cap rate (which measures the property's performance independent of financing) and total return analysis (which captures all value drivers). A deal with a modest 7% cash-on-cash return might still be excellent when appreciation, equity build, and depreciation tax savings are included.
Formula
Cash-on-Cash Return = (Annual Pre-Tax Cash Flow ÷ Total Cash Invested) × 100
Real-world example
Scenario
Investor buys a $450,000 STR with 20% down ($90,000) + $8,000 closing costs + $12,000 for furnishing = $110,000 total cash invested. Property generates $68,000 gross revenue annually.
Calculation
Total annual expenses including mortgage ($28,000), PM fees (18%), taxes, insurance, utilities, maintenance = $53,000. Annual cash flow = $68,000 − $53,000 = $15,000. Cash-on-Cash = $15,000 ÷ $110,000 × 100 = 13.6%.
Result
13.6% CoC is a strong result for a well-located STR. Use Chalet's calculator to model this with real market ADR and occupancy data for any address — the revenue assumptions drive everything.
Why it matters for STR investors
Cash-on-cash return is the bridge between property-level performance (cap rate) and investor-level performance — your actual pocket return on the cash you put in. It is the most practical metric for comparing STR deals, because it reflects the real-world impact of your specific financing terms, not a hypothetical all-cash scenario.
Key points
- Accounts for your financing — unlike cap rate, which ignores the mortgage
- Excludes appreciation and equity paydown (for full picture, use total return)
- Typical STR target range: 8–15% in established markets
- More leverage = higher CoC but also higher risk — model both scenarios
- Pre-tax metric; add after-tax value of depreciation for a more complete picture
- Furnishing and setup costs at purchase are often underestimated — include them
Related terms
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