Underwrite a rental before it becomes your problem.

Cash-on-cash return is your annual pre-tax cash flow divided by the total cash you invested, including the down payment, closing costs, and any upfront repairs. For example, 6,000 dollars of yearly cash flow on 60,000 dollars invested is a 10 percent cash-on-cash return. It measures how hard your actual cash is working.

Many long-term rental investors aim for a cash-on-cash return in the high single digits or low double digits, though acceptable targets depend on the market, risk, and how much appreciation you expect. Lower-risk areas often return less in cash flow, while higher-risk properties may need a larger return to justify the work.

Estimate gross rent and other income, subtract vacancy and operating expenses such as taxes, insurance, repairs, and management, then subtract debt service. What remains is your cash flow, which you compare against the cash invested to find cash-on-cash return. The key is using honest, conservative expense numbers.

Include property taxes, insurance, property management, repairs and maintenance, vacancy, capital expenditure reserves, and any utilities or HOA fees you cover. Many beginner deals look good only because these costs were left out. A rule of thumb is that operating expenses often run around 40 to 50 percent of gross rent.