Cash-on-cash return, explained
Why a financed property's real return depends on your down payment, not its price.
Net rental yield measures income against a property’s full value — but if you financed the purchase with a loan, that’s not the number that reflects your actual investment. Cash-on- cash return measures the exact same income against only the cash you put in, and financing can push the two numbers wildly apart.
Same income, a completely different return
A property earning the identical rupee amount of net rental income can look like a modest return or a spectacular one, purely depending on how much of the purchase was your own cash versus a lender’s money. The income doesn’t change; only the denominator you’re measuring it against does.
Worked example: leverage amplifies the number
Using the Rental Yield Calculator’s own defaults — a ₹60,00,000 property earning ₹1,60,000 in net annual income (the same figure worked through in Gross vs. net rental yield) — a 20% down payment (₹12,00,000 cash) gives a 13.33% cash-on-cash return. Drop the down payment to 10% (₹6,00,000 cash) and the same income produces 26.67%. Raise it to 50% (₹30,00,000 cash) instead, and it falls to 5.33%. At 100% cash — no loan at all — cash-on-cash return equals net yield exactly, at 2.67%, confirming the formula collapses to the unlevered case when there’s no financing involved.
Work out the annual rental yield you're earning on a property.
The risk leverage doesn’t show in the yield figure
A 26.67% cash-on-cash return looks dramatically better than a 13.33% one, but neither number reflects the debt sitting underneath it. Financing more of a purchase amplifies your return on the cash you did put in — but it also means a larger EMI to service every month, and more exposure if rent falls or the property sits vacant longer than expected. Cash-on-cash return tells you how hard your invested cash is working; it doesn’t tell you how much risk you took on to get that number.
When comparing two financed properties, check both the cash-on-cash return and the underlying loan terms together, not the return figure in isolation — a higher number achieved through heavier leverage isn’t automatically the better investment, just a riskier route to a similar income.
All figures are indicative and for educational purposes only — not financial advice.
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