Cash-on-cash is one division and it is worth doing precisely
Annual pre-tax cash flow divided by total cash invested. That is it. Cash flow is what remains after every operating cost and the loan payment, with the reserves funded. Cash invested is every dollar that left your account to get the property producing: down payment, closing costs, and the rehab or make-ready before the first tenant.
Two things get left out of the denominator and both inflate the answer. The first is closing costs, on the reasoning that they were rolled into the loan or were somehow not part of the purchase. If you paid them in cash, they are cash invested. The second is the make-ready, which people mentally file under maintenance because it involved paint. If it happened before the property could be rented, it was capital going in, not an operating cost.
Unlike cap rate, cash-on-cash deliberately does include the loan. The two measures are complementary rather than competing: cap rate describes the building, cash-on-cash describes your position in it. If you want both computed side by side on a single property together with a coverage ratio, the existing rental yield calculator lays all four out at once.
Why paydown and appreciation get their own lines
They are both real. Every month the loan balance falls, your equity rises by exactly that amount, and that is not an accounting fiction. If the property is worth more in a year, that is real too, in the sense that a buyer would pay it.
What they are not is money. There is no month in which principal paydown appears in your account. There is no month in which appreciation does either. Reaching them requires a transaction: a sale, which costs a meaningful percentage in fees and possibly a tax event, or a cash-out refinance, which costs closing costs and hands you a new loan at whatever rate exists that week.
The distinction matters because the two categories fail differently. Cash flow that is wrong is wrong by a small amount and you find out within a year. An appreciation assumption that is wrong can be wrong by the entire amount, in either direction, and you find out at the worst possible moment, which is when you need to sell. A total return figure that runs the two together into one percentage hides which kind of number you are relying on.
The paydown figure, calculated properly
This page runs the actual amortisation schedule month by month rather than approximating. That matters more than it sounds, because the split between interest and principal moves enormously across the life of a loan and not at all evenly.
| Year of a 30-year loan | Roughly what the payment is doing |
|---|---|
| Year 1 | Mostly interest. Principal paydown is a small fraction of what you pay in. |
| Year 10 | The split is moving but interest is still ahead on most rates. |
| Year 20 | Principal now dominates and the equity line climbs quickly. |
| Year 30 | Almost entirely principal. The last payments barely carry interest at all. |
The consequence for this calculator is that a total return quoted for year one and a total return quoted for year twenty are different numbers on the same unchanged property, and neither is wrong. Change the year field and watch the paydown line move. Anyone quoting a single total return figure for a rental without saying which year they mean is quoting something under-specified.
Read the four lines separately, then decide
The useful output of this page is not the total. It is the breakdown underneath it: how much of the return is cash, how much is equity you cannot touch, and how much is an assumption you typed in yourself. Set appreciation to zero and the total drops to what the property returns on evidence. If the deal only works with a growth assumption in it, that is worth knowing before rather than after.
And none of it is after tax. Rental income, depreciation, what happens on a sale, how any of it interacts with your other income — those are questions for a CPA who knows your state and your structure, and the answers change. This page stops at pre-tax arithmetic on purpose. If the cash flow figure you entered came from a rough guess, build it properly with the reserve calculator first, since an optimistic cash flow makes every percentage on this page optimistic in exactly the same proportion.
Questions people ask
What counts as cash invested?
Every dollar that left your account before the property produced income. Down payment, closing costs you paid rather than financed, inspection and appraisal fees, legal costs, and the rehab or make-ready. Holding costs during a renovation belong there too — the mortgage payments, taxes and utilities while the property sat empty are money you put in with nothing coming back. What does not belong is anything financed rather than paid, since that is the loan's money and it shows up instead as a larger debt service line reducing your cash flow.
Should appreciation be in a return figure at all?
It is legitimate to include it as long as it is labelled as what it is, which is why this page shows it on its own line and shows the total again with it removed. The problem is not including it, the problem is including it silently. A total return that is mostly a growth assumption is a forecast dressed as a measurement, and the person most likely to be misled by it is the person who typed the assumption in. Set it to zero, look at the number, and then decide what you think a realistic figure is and how much of your case rests on it.
Why is my first-year principal paydown so small?
Because interest is charged on the balance, and in year one the balance is almost the whole loan. On a 30-year loan at rates in the range this page defaults to, something like four fifths of each early payment is interest. That is not a fee or a penalty, it is the arithmetic of interest on a large balance. It also means the equity-building argument for a mortgage is genuinely weak in the early years and genuinely strong later, which is the opposite of how it usually gets described.
What about the tax side — surely that changes the return?
It does, sometimes substantially, and this page will not tell you how. Rental income, what expenses can be deducted, how depreciation works, what recapture happens on a sale, how any of it interacts with your other income and whether the property is held personally or in an entity all sit in federal plus state rules that change and that differ by situation. Any figure a calculator gave you would be a guess presented as fact. Take the pre-tax numbers from this page to a CPA who handles rental returns and let them tell you what the after-tax version looks like.
The total return percentage looks high. Is that a good deal?
This page does not answer that and no calculator should. What it can tell you is where the number came from: split it into the cash portion, the paydown portion and the assumption portion using the breakdown shown. A high total that is three quarters appreciation on a property with negative cash flow is a very different proposition from the same total made mostly of cash flow, and the two carry entirely different risks. The size of the number tells you much less than its composition does.