How Do Initial Repairs Affect Your Cash-on-Cash Return?

Question

Something I’ve been thinking about when analyzing rental properties is how much initial repairs can change the cash-on-cash return.

A property might look attractive based on the down payment and projected cash flow, but adding several thousand dollars in repairs or renovations increases the total cash invested.

Do you include those initial costs in your cash-on-cash calculation from the beginning?

How do you normally estimate them before closing?

Halenah Eva · Answer

@Nicholas Floyd That’s a good approach. I agree that contractor estimates and inspection findings give a much more realistic starting point than simply adding a general repair percentage. I also like the idea of adding a contingency and accounting for financing costs when applicable.

It really shows how small changes in the upfront numbers can affect the actual cash-on-cash return. I’m working on improving how I evaluate these details when comparing rental deals, so this is helpful to keep in mind.

Drew Sygit · Answer

ANY and ALL numbers you run should be based on acquisition costs = purchase price + repairs.

You could even add in transaction costs of the acquisition.

Aaron Zimmerman · Answer

I would include the repairs as initial costs. If they're small, I guess about how much it will Cost to fix or ask a handyman.

if it's a bigger system like hvac, electrical, roof, foundation, plumbing, etc, it's best to get one quote and then can figure out post close

Gregory Acs · Answer

Hi Halenah,

Yes, I always include the initial repair costs in my cash-on-cash calculation because they're part of the total cash invested to get the property performing as expected. Leaving them out can make a deal look much stronger than it actually is.

Before closing, I'd get contractor estimates whenever possible and add a contingency for unexpected repairs. I also like to run the numbers using different financing scenarios because the loan structure can have a meaningful impact on your cash-on-cash return. If anyone is comparing financing options for an investment property, I'd be happy to help review the numbers.

Divin Kanyama · Answer

@Halenah Eva Initial repairs and renovations should be included in the cash-on-cash calculation from the beginning. The metric is most useful when the denominator reflects the total cash required to acquire and stabilize the property, not just the down payment. That generally includes the down payment, closing costs, immediate repairs, and any carrying costs or reserves needed before the property reaches its projected performance.

Before closing, a detailed property inspection, contractor walk-throughs, and written estimates can help establish a realistic budget for the major items. Repairs can be separated into immediate needs, near-term capital expenditures, and optional improvements so the underwriting does not treat every upgrade as equally urgent. A contingency of 10% to 20%, depending on the property’s age and condition, can also help account for costs that surface once work begins.

It is also helpful to run the deal under two scenarios: the expected repair budget and a higher-cost case. If the return only works when every repair comes in at the low end, the margin may be too thin. Including those costs upfront can make the cash-on-cash return look lower, but it provides a more realistic picture of the investment and helps avoid surprises after closing.

Nicholas Floyd · Answer

I’d include the initial repairs and renovation costs from the beginning. Otherwise, the cash-on-cash return can look better on paper than it really is. Before closing, I like to work from contractor estimates, inspection findings, and add a contingency for unexpected costs. If some of the repairs are being financed instead of paid completely out of pocket, I’d also factor the financing costs into the numbers. The goal is to know the true return before committing to the deal.

Nicholas Floyd · Answer

Yes, I include the initial repairs from the beginning because they’re part of the total cash I have invested in the deal. I’d also account for the down payment, closing costs, carrying costs and a repair contingency. Before closing, I like to get a contractor walkthrough and build a line-item repair budget, then add around 10–15% for surprises.

Financing can also make a big difference in the cash-on-cash return since reducing the amount of cash tied up in the deal can preserve capital, but the numbers still have to make sense with the added financing cost. I always think it’s important to run the deal conservatively and only leverage what you can comfortably afford.

Halenah Eva · Answer

@Nicholas Floyd That makes sense. I especially like the point about using a line-item repair budget instead of relying on a general estimate. Adding carrying costs and a contingency also gives a much more realistic picture of how much cash is actually tied up in the deal.

The financing point is important too. A lower initial cash requirement can improve the calculated CoC return, but the additional financing cost needs to be considered alongside it.

I’m going to keep these factors in mind when comparing deals. Thanks for sharing your approach!

Halenah Eva · Answer

@Don Konipol Thanks for explaining this in detail. I especially found the distinction between tax accounting and investment accounting helpful. It also highlights why I think it’s important to separate the different costs when analyzing a deal rather than relying on one return figure.

For cash-on-cash analysis, including the actual upfront cash invested and accounting for major capital expenditures seems important for getting a more realistic picture of the return. I’m currently trying to improve how I structure my rental property analysis, so your approach gives me another useful perspective to consider.

Don Konipol · Answer

There’s two answers to the question.

For tax accounting, most investors who are trying to report the smallest income possible or the largest loss, try to expense capital improvements or major capital expenditures in the year the expenditure is incurred. For tax accounting, the base cost is the original purchase price (minor variations for some expenditures incurred in preliminary work that need to be capitalized) + capital improvements NOT expenses less depreciation.

For calculating ROI, I calculate differently, so my “tax” returns don’t correlate with my investment accounting. This is actually very common.

I add the adjusted purchase price to any expenditures I incurred prior to leasing the property and tenant possession. I will add major capital expenditures to this number even if they occur after tenancy. Any expenses for maintenance, repairs, etc. is subtracted from gross income to arrive at the net figure used to calculate CURRENT ROI.

For cash on cash return, interest is subtracted from operating income, depreciation is added back to operating income, and this number is divided by down payment plus capital expenditures.

A more sophisticated calculation would require deduction for a baseline depreciation or more technically a replacmemt reserve.

How Do Initial Repairs Affect Your Cash-on-Cash Return?

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