ROI vs Cash-on-Cash: What Landlords Must Know

You’ve scoped out a promising rental deal, crunched some numbers, and now you’re weighing two key metrics: return on investment (ROI) and cash-on-cash return. Both help you evaluate property performance, but they answer slightly different questions. In this ultimate guide you’ll learn when to use each metric, how to calculate them manually, and how a rental property ROI calculator can streamline your analysis. Let’s dive in.

Understand key metrics

Before you run any formulas, get clear on what each metric measures and why it matters.

What is return on investment (ROI)

Return on investment (ROI) shows the overall profitability of a property relative to your total investment. It takes into account purchase price, closing costs, repairs, financing charges, and operating expenses. You express ROI as a percentage to compare deals of any size or structure.

Key points:

• Captures net profit over total investment  
• Useful for long-term performance and portfolio comparisons  
• Includes non-cash expenses like mortgage interest  

You can find a detailed ROI definition and examples on Rentastic’s blog (Rentastic).

What is cash-on-cash return

Cash-on-cash return focuses solely on actual cash you’ve put into the deal versus the annual pre-tax cash flow it generates. Unlike ROI, it ignores non-cash items and focuses on liquidity.

Key points:

• Measures annual pre-tax cash flow divided by total cash invested  
• Ideal for assessing rental income performance  
• Excludes depreciation, amortization, and financing fees  

For an in-depth look, see Rentastic’s encyclopedia entry (Rentastic).

Why cap rate isn’t enough

You may also hear about capitalization rate, or cap rate. That’s net operating income divided by property value. Cap rate is handy for quick market comparisons, but it ignores financing and cash invested. Use cap rate to gauge market yields and risk, then drill down with ROI or cash-on-cash return for deal specifics.

Calculate your ROI

Calculating ROI manually helps you appreciate each line item and catch errors before you commit.

ROI formula

Use this formula for cash purchases:

ROI (%) = (Annual rental income – Annual expenses)           / Total investment × 100

For financed deals, incorporate mortgage payments:

ROI (%) = (Annual rental income – Annual expenses – Annual mortgage payments)          / Total investment × 100

Itemize your inputs

1. Purchase price  
2. Closing costs (fees, title insurance, transfer taxes)  
3. Repair or renovation budget  
4. Annual rental income (gross)  
5. Annual operating expenses (taxes, insurance, maintenance, HOA)  
6. Mortgage payments (principal + interest)  

Sample ROI calculation

Imagine you buy a rental for $100,000, pay $10,000 in closing and repairs, collect $24,000 in rent, and incur $5,000 in expenses. No financing.

• Total investment = $100,000 + $10,000 = $110,000  
• Net income = $24,000 – $5,000 = $19,000  
• ROI = $19,000 / $110,000 × 100 ≈ 17.27%  

Now finance the deal with a mortgage that costs $8,000 per year:

• Net income after financing = $19,000 – $8,000 = $11,000  
• Total cash invested = $110,000 – financed amount? No—the full cash invested remains $110,000 if you paid cash. If you put down $40,000, adjust accordingly:  
• Cash invested = down payment + closing & repair costs  
• ROI = $11,000 / $50,000 × 100 = 22%

Consistency in assumptions—down payment, loan terms, expense estimates—ensures apples-to-apples ROI comparisons (Rentastic).

Calculate cash-on-cash return

When cash flow matters most, cash-on-cash return keeps the focus on your actual cash at risk.

Cash-on-cash formula

Cash-on-cash return (%) = Annual pre-tax cash flow                          / Total cash invested × 100

Pre-tax cash flow = gross rental income – operating expenses – mortgage payments.

Example cash-on-cash calculation

Using a $120,000 cash purchase that nets $9,000 per year:

• Annual cash flow = $9,000  
• Cash invested = $120,000  
• Cash-on-cash return = $9,000 / $120,000 × 100 = 7.5%  

If you finance with a $40,000 down payment, $12,000 rent, $3,000 expenses, and $8,000 mortgage:

• Annual cash flow = $12,000 – $3,000 – $8,000 = $1,000  
• Cash invested = $40,000 + closing & repair costs (assume $10,000) = $50,000  
• Cash-on-cash = $1,000 / $50,000 × 100 = 2%

This metric quickly flags whether your deal meets your yield thresholds before you factor in tax benefits or appreciation (Rentastic).

Compare key metrics

ROI and cash-on-cash return both measure returns, but they shine in different scenarios. Use the right metric at the right stage.

Side-by-side comparison

When to use ROI

• You want a comprehensive view of profit over the hold period  
• You’re comparing deals with varied financing terms  
• You’re incorporating tax, depreciation, and appreciation forecasts  

When to use cash-on-cash

• You need to hit a minimum cash yield for debt service or distributions  
• You’re focusing on liquidity and your annual cash return  
• You’re evaluating performance of income-generating properties  

Use a ROI calculator

Manual calculations build understanding, but they can get tedious. A rental property ROI calculator automates inputs, runs scenarios, and tracks your deals over time.

Benefits of an automated tool

• Instant recalculations when you tweak inputs  
• Deal analysis across multiple properties in one dashboard  
• Real-time syncing with your bank accounts for income and expenses  
• Stress-testing scenarios for rent drops or expense spikes  

Rentastic’s Deal Analyzer brings your key performance indicators—Cap rate, ROI, cash-on-cash—into one platform so you can spot underperforming assets fast (Rentastic).

How it works

1. Enter purchase details: price, closing fees, renovation costs  
2. Link your bank for real-time income and expense data  
3. Choose financing terms or cash purchase  
4. View instant ROI, cash-on-cash and cap rate outputs  
5. Run “what-if” stress tests to see how a 5% rent change affects your returns (Rentastic)  

With a rental property ROI calculator you’ll reduce manual errors and spend more time on deal-making.

Interpret your results

Numbers only matter if you know what to do with them.

Set realistic benchmarks

• Aim for a cash-on-cash return above 8% to 12% in today’s market  
• Target an ROI that clears your personal hurdle rate, factoring in market trends and property type (Rentastic)  
• Use cap rate to compare similar properties by location and asset class  

Stress-test scenarios

Running sensitivity analyses helps you prepare for unexpected shifts:

• Decrease rent by 5% or increase expenses by 10%  
• Extend vacancy periods to account for turn times  
• Model interest rate rises if you’re on an adjustable loan  

Tools with AI-driven scenario testing cut your analysis time from days to minutes and build contingencies into your underwriting.

Track performance over time

Don’t let your assumptions gather dust after acquisition. Sync monthly or quarterly Profit & Loss statements, review KPIs, and flag properties that slip below your thresholds. Automated dashboards help you:

• Spot expense overruns  
• Track rent payment timeliness  
• Compare actual vs forecast cash flow  

Csonclusion and next steps

ROI and cash-on-cash return each answer critical questions: overall profitability versus cash yield. Armed with both metrics—and a rental property ROI calculator—you’ll make faster, more confident decisions.

1. Calculate ROI and cash-on-cash return manually to understand your deal  
2. Set your target benchmarks: cash yield, ROI hurdle rate, cap rate comparables  
3. Plug your numbers into a calculator to stress-test and streamline analysis  
4. Track your performance continually with real-time dashboards  

You’ve got the formulas, the use cases, and the right tool advice. Now go run your next deal through a rental property ROI calculator and watch your investment strategy get sharper and more data driven.