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Why cash-on-cash understates a leveraged deal

Cash-on-cash return measures annual cash flow against the cash you put in. It is useful, but it ignores two of the biggest wealth drivers in real estate. Every mortgage payment your tenant covers pays down your principal, and any appreciation accrues on the entire property value, not just your down payment. A property with modest or even slightly negative cash flow can still deliver a strong total return once those are counted — which is exactly what leverage does. The bank funds most of the asset while you keep all of the growth.

DSCR is how lenders see the deal

Debt service coverage ratio compares rent to the full payment including taxes, insurance and HOA. DSCR lenders generally want to see 1.20 to 1.25 or better, and a deal at that level can often be financed on the property income without tax returns. Below 1.0, rent does not cover the payment and the deal needs a different price, more down, or stronger rents. The calculator grades yours and explains what the number means in plain language.

Model the boring inputs honestly

The fastest way to talk yourself into a bad deal is to set vacancy, maintenance and management to zero. Units sit empty between tenants, things break, and if you ever want to stop self-managing, that fee appears. Leave realistic allowances in place. A deal that still pencils with honest assumptions is a deal worth pursuing; one that only works at zero vacancy is a job, not an investment.

Common questions

What is a good DSCR for a rental?

Most DSCR lenders look for 1.20 to 1.25 or higher. Above that generally finances cleanly on property income; below 1.0 means rent does not cover the payment.

What is the 1% rule?

A quick screen suggesting monthly rent should be roughly one percent of purchase price. It is a filter, not an answer, and it is difficult to hit in appreciating metro markets like the Front Range.

Why is total ROI higher than cash-on-cash?

Because it counts principal paydown and appreciation alongside cash flow. Cash-on-cash only measures cash flow against cash invested.

More calculators

• Mortgage Payment (PITI) — See your true monthly payment, not just principal and interest
• Rate Buydown & Points — Permanent points and 1-0, 1-1, 2-1, 3-2-1 temporary buydowns
• Affordability & DTI — What price you qualify for, and what you should actually spend
• Rent vs. Buy — Break-even year and net position over time
• Seller Net Sheet — What you actually walk away with after costs and payoff
• Refinance Break-Even — Monthly savings, break-even month, and lifetime interest

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Educational estimate only — not a loan approval, appraisal, or tax advice. Michael Rush is a licensed REALTOR® with Keller Williams Realty DTC, not a lender, CPA, or attorney. Equal Housing Opportunity.