What is a good cash-on-cash return?

What cash-on-cash return measures

Cash-on-cash return divides a rental's yearly pre-tax cash flow by the cash you put in. It shows what your own money earns in year 1 once the mortgage is paid.

Pre-tax cash flow is the rent left after vacancy, running costs and mortgage payments. On House 1 below, 9.3% means each $100 you put in brings back $9.30 a year.

The calculation takes 4 inputs.

• Rent: Multiply the verified monthly rent by 12 and take off vacancy.
• Running costs: Count management, property tax, insurance and maintenance.
• Mortgage payments: Use 12 months of payments at the rate your lender quotes.
• Cash invested: Add the down payment, closing costs and any repairs before the first tenant.

3 real Birmingham houses from a Homesage.ai search

We pulled 3 active single-family houses with a verified rent from Investment Property Search. All 3 sit in Birmingham, Alabama. Every line below is our own math at 25% down and a 7.28% rate.

Verified rent here means the rent advertised on a recent rental listing for each house, checked in our listing data. No lease stands behind it.

Only House 1 lands in the 8% to 12% range, with a 9.3% cash-on-cash return. Its rent is 1.22% of the list price each month. The other 2 rent for 0.94% and 0.71% of their price, and both lose money once the mortgage is paid.

The loan decides whether a house earns or loses cash. At 7.28%, a 30-year mortgage costs 8.21% of the loan each year. House 2 has a 5.7% cap rate, below that cost, so it loses $624 a year.

Only 1 of the 3 Birmingham houses cleared 8% with a loan, and it rents for 1.22% of its price each month.

How to calculate cash-on-cash return

1. Add up the cash you put in. Count the down payment, closing costs and any repairs before the first tenant. Freddie Mac puts closing costs at 2% to 5% of the purchase price, and we used 3%.
2. Start from the verified rent. Multiply it by 12, then take off vacancy. The US Census Bureau put the national rental vacancy rate at 7.3% in Q2 2026.
3. Subtract the running costs. Property managers charge 8% to 12% of the rent, according to Forbes Advisor, and we used 10%. Fannie Mae budgets maintenance at 1% to 4% of the home's value a year, and we used 1%. For insurance, we used Alabama's 2022 average homeowners premium of $1,748 from the Insurance Information Institute.
4. Subtract 12 months of mortgage payments. Use the rate on your lender's quote, because investment loans price above the weekly average.
5. Divide the cash flow by the cash you put in. On House 1, $4,572 divided by $48,972 gives 9.3%. Our guide to the full return on a rental property adds equity and appreciation.

What moves the return up or down

The rate moves your cash-on-cash return the most. Freddie Mac's weekly mortgage survey put the 30-year fixed rate at 7.28% on 2026-10-01, up from 6.34% a year earlier. At 8.28%, House 1 drops from 9.3% to 7.1%.

Investment loans cost more than that average. Fannie Mae's LLPA Matrix charges 2.125% of the loan on an investment purchase at 70% to 75% loan-to-value. From 75% to 80%, the charge is 3.375%. Get a lender quote before you count on any rate.

Fannie Mae's Eligibility Matrix allows as little as 15% down on a 1-unit investment property. Above 80% loan-to-value, its Selling Guide requires mortgage insurance. Less down raises the return only while the cap rate beats the loan's yearly cost.

House 1 has an 8.8% cap rate, so 20% down lifts its return to 9.6% at 7.28%. At 8.28%, the loan costs 9.04% a year, and 20% down drops it to 6.7%. Our guide to what makes a good cap rate explains that first number.

Property tax runs higher on a rental in Alabama. The Alabama Department of Revenue assesses it at 20% of value, against 10% for a home its owner lives in. Birmingham's rates add up to 72.5 mills in the state millage table, so the tax comes to 1.45% of value a year.

Maintenance moves it too. Fannie Mae suggests leaning toward 4% for a home over 30 years old. At 2% of value instead of 1%, House 1 falls to 5.8%. A refinance changes the cash side, and our guide to the BRRRR method shows how much cash one hands back.

Common cash-on-cash mistakes to avoid

• Leaving out vacancy: Vacancy takes $1,870 a year from House 1, or 41% of its $4,572 cash flow. Budget at least the 7.3% national rate, and more where local vacancy runs higher.
• Counting on the average rate: Freddie Mac's 7.28% is an average, and investment loans cost more. At 8.28%, House 1 drops from 9.3% to 7.1%, so price the loan from a lender quote.
• Pricing upkeep without seeing the house: A list price and a rent say nothing about the roof or the wiring. At 2% maintenance instead of 1%, House 1 falls from 9.3% to 5.8%, so get an inspection first.
• Reading it as your total return: The principal you repay counts as cash out here, even though it builds equity. The figure also leaves out any rise in value, so judge the whole deal on its total return.

Estimated values. Not investment advice. Data as of 2026-10-04.

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