RETrackerCash-on-cash return is your annual pre-tax cash flow divided by the total cash you invested: cash-on-cash = annual cash flow ÷ cash invested. Unlike cap rate, it accounts for your mortgage and your down payment, so it tells you what your actual money earns each year.
What is cash-on-cash return?
Cash-on-cash measures the cash yield on the cash you put in — down payment plus closing costs plus any upfront repairs. It is the number that answers “if I sink $168,000 into this deal, how much cash comes back this year?” Because it is levered, it reflects your specific financing, not the building in the abstract.The formula
Cash-on-cash = annual pre-tax cash flow ÷ total cash invested. Cash flow = NOI − annual debt service (mortgage principal + interest). Cash invested = down payment + closing costs (including the welcome tax and legal fees) + any initial renovations.Cash-on-cash calculator
Worked example
Take a $600,000 triplex that rents for $54,000 a year ($1,500 per unit per month). Operating expenses — property tax, insurance, maintenance, a vacancy allowance and management — run about 32% of rent, or $17,280, leaving net operating income (NOI) of $36,720. You put 25% down ($150,000) plus roughly $18,000 of closing costs including the welcome tax, so $168,000 of cash goes in. The $450,000 mortgage at 5.0% over 25 years costs about $31,572 a year ($2,631 a month).
Annual cash flow is NOI minus debt service: $36,720 − $31,572 = $5,148. Total cash invested is the $150,000 down payment plus about $18,000 of closing costs = $168,000. Cash-on-cash = $5,148 ÷ $168,000 = 3.1%.What is a good cash-on-cash return?
Many Canadian buy-and-hold investors target 4–8% cash-on-cash, but in high-price markets like Toronto and Vancouver, quality properties often start near breakeven and rely on appreciation and paydown for their return. A low cash-on-cash is not automatically a bad deal — check the IRR — but negative cash flow means you are funding the property out of pocket every month.Cash-on-cash vs cap rate vs IRR
- Cap rate is unlevered and ignores your mortgage.
- Cash-on-cash is levered but single-year — it ignores appreciation and principal paydown.
- IRR captures the whole hold, including the sale.
- Use all three: cap rate to compare, cash-on-cash to check monthly reality, IRR to judge the total return.
Frequently asked questions
What is the difference between cash-on-cash and ROI?
Cash-on-cash is a precise annual measure: cash flow ÷ cash invested, pre-tax. ROI is a general term that may fold in appreciation, paydown and taxes. For a single year of cash performance, use cash-on-cash.
Does cash-on-cash include principal paydown?
No. It counts only the cash that hits your pocket. The equity you build by paying down the mortgage shows up in your IRR and your net worth, not in cash-on-cash.
Should cash-on-cash use pre-tax or after-tax cash flow?
The standard definition is pre-tax. Your after-tax return depends on your marginal rate and the deductions you claim on CRA Form T776.
Why is my cash-on-cash negative?
Because your mortgage and expenses exceed your rent — the property costs you money each month. That can still work if appreciation is strong, but you need the cash reserves to carry it.
Keep reading
Cap rate
The unlevered yield: NOI divided by price.
DSCR
The ratio lenders use to size your loan.
IRR
Your total time-weighted return, including the sale.
How to analyze a rental deal
The four numbers every Canadian investor runs before buying.
Sources
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