Annual pre-tax cash flow divided by total cash invested, showing the return on your actual out-of-pocket investment. If you put $100,000 down on a rental property and it generates $6,000 in annual cash flow after all expenses and mortgage payments, your cash-on-cash return is 6%. It measures the yield on the money you physically invested, not the total property value.
Why It Matters
Cash-on-cash return tells you how hard your actual dollars are working. In the GTA, where down payments are large, this metric helps you decide whether your money is better deployed in real estate or elsewhere. Many GTA condos show low cash-on-cash returns in the first few years because of high purchase prices, but the metric improves as rents rise and the mortgage is paid down.
Real-World Example
You buy a rental condo in Etobicoke for $500,000, putting $100,000 down plus $20,000 in closing costs. Your total cash invested is $120,000. The unit rents for $2,300 per month. After mortgage payments of $1,950, condo fees of $450, property tax of $250, and insurance of $50, your monthly cash flow is negative $400, or negative $4,800 per year. Your cash-on-cash return is -4%, meaning you are paying $4,800 annually out of pocket to hold the property. If rents rise to $2,800 and expenses stay flat, cash flow turns positive and the return flips to a positive 1%.
Ontario & GTA Context
GTA investors often accept low or negative cash-on-cash returns in the first few years because Toronto's strong appreciation history has historically rewarded patient holders. However, with interest rates higher than the 2020-2021 lows, many new GTA investment condos now show -3% to -5% cash-on-cash returns at purchase. Ontario's rent control rules also limit how quickly you can increase rents on controlled units to improve this metric.
How It Works in Practice
Calculate your cash-on-cash return before and after tax -- mortgage interest, property tax, and depreciation (CCA) on rental properties are deductible against rental income in Canada, which can improve your after-tax return. Update the calculation annually as rents, expenses, and interest rates change.
Common Questions
What is a good cash-on-cash return for a rental property?▾
How do I improve cash-on-cash return on a GTA rental?▾
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