The formula only counts money that actually left your pocket: your down payment, closing costs and any upfront repairs, not the full purchase price. A $50,000 cash investment that generates $4,000 in net cash flow after the mortgage payment produces an 8 percent cash-on-cash return, a different and usually lower number than overall return on investment.
It ignores mortgage paydown, appreciation and tax benefits entirely, which is exactly why investors use it alongside those other measures rather than instead of them. Two properties with identical cash-on-cash numbers can have very different long term outcomes once equity growth is factored in.
Joel Dyck runs this math against actual Saskatoon rental comparables rather than a generic online calculator. Get your hand-reviewed valuation from Joel Dyck.