Cash-on-cash return measures how hard your invested money is working. You divide the property’s annual pre-tax cash flow by the total cash you put in — down payment, closing costs, and any upfront repairs — not the full purchase price. A $40,000 investment throwing off $4,000 a year in cash flow is a 10% cash-on-cash return.
Unlike cap rate, it accounts for financing, so using more leverage changes the answer. It reflects your actual out-of-pocket return in a given year, but it ignores appreciation, loan paydown, and tax effects — so read it alongside cap rate and cash flow rather than on its own.