Cash-on-cash return:
what your own money earns each year

A yield on the cash you actually put in

Cash-on-cash return answers a narrow question: for each rupee of your own money placed in a property, how many rupees come back in a year as spendable cash? Property that earns ₹1,20,000 a year after all running costs and loan payments, on ₹15,00,000 of cash invested, returns 8%.

It differs from the headline rental yield, which ignores financing, and from total return, which includes price growth. Cash-on-cash ignores both and measures only the cash in your account.

Building the annual cash flow line by line

Take a small commercial unit bought with a loan. The numbers are illustrative; actual rents and costs depend entirely on the location and property.

Notice that loan payments are subtracted in full, principal as well as interest, because both are cash leaving your account. That is the main reason the measure can look low for leveraged property: part of what you pay each month is building equity in the asset, which the figure does not credit you for.

Counting every rupee invested

The denominator is where people flatter themselves. It must include all cash that went in, not just the down payment.

Omitted costs such as legal fees, society transfer charges, furnishing and a cash reserve for repairs all belong in the base. If you borrowed to cover these as well, count only what came out of your pocket.

How a loan changes the answer

Borrowing reduces the cash you need, which can raise the return, but it adds payments, which reduce the cash flow. The result depends on the cost of the loan against what the property earns. Compare the same property bought two ways.

Here the loan lowers the measured return, because annual payments of ₹90,000 on a ₹7,50,000 loan are 12% of the amount borrowed, more than the property earns on the money it replaced. With a cheaper or longer loan the pattern reverses. Run the comparison for your own terms rather than assuming that borrowing helps.

Stress-testing the number

A single-year figure assumes the unit is let all year. Test what a two-month vacancy does to the same property. Rent falls by 2 × ₹19,000 = ₹38,000, to ₹1,90,000. Costs and loan payments continue, so cash flow becomes 1,90,000 − 18,000 − 90,000 = ₹82,000, and the return falls to 82,000 ÷ 15,00,000 = 5.47%.

That is a drop of more than two and a half percentage points from one empty quarter-year, and it shows why leveraged property is sensitive. A fixed loan payment does not care whether there is a tenant. A careful investor tries a vacancy case, a case with a repair bill and a case with a higher loan rate if the loan floats, and checks that the cash flow stays positive in each.

Think also about the cash reserve. A figure of ₹1,20,000 a year does not help if an unexpected repair of ₹1,50,000 arrives in month three. Setting aside part of the cash flow, or counting a reserve in the cash invested, makes the return look lower but the plan more honest.

How it sits beside yield and cap rate

Three related figures are often mixed up. Gross rental yield is annual rent divided by the purchase price. Capitalisation rate, or cap rate, is net operating income divided by price. Cash-on-cash return uses your cash and the cash flow after financing. On the illustrative ₹20,00,000 purchase price used above, the three come out as follows.

These are worked figures for the example, not typical market values; rents and prices differ by city and property type. What matters is that each answers a different question: yield and cap rate describe the property, and cash-on-cash describes your financing and your cash.

What the figure leaves out

• Price appreciation: a property that rises in value can beat a higher cash-on-cash holding that does not.
• Principal repayment: it reduces your loan, which is a form of saving, but is treated here as an expense.
• Tax: the measure is before tax, and rental income, interest deductions and capital gains rules vary and change.
• Time: it uses a single year, so a new property with a vacancy or a fit-out year can look worse than it will be.
• Risk: a stable tenant and an unlet unit can show the same projected number.

Using it to compare options

Time horizon matters too. The first year of ownership often carries one-off costs that later years do not, while rents typically get revised upward at renewal. Calculating the figure for year one and again for a typical later year, with the one-off costs removed from the cash flow but not from the amount invested, shows how the return develops rather than fixing a single snapshot.

The measure is most useful when comparing similar properties, or comparing a property with alternatives such as a fixed deposit, since all are expressed as a percentage of cash invested per year. An 8% cash-on-cash figure on a property that also may need a major repair in three years is a different proposition from 8% on a new unit.

A cash-on-cash return calculator saves you assembling the sheet each time, but the quality of the answer depends on realistic rent, a fair vacancy allowance and a full count of costs. Check the current taxation and local rules before relying on the numbers, and consider speaking to a qualified adviser for your own situation.