Introduction to Real Estate Investment Deal Analysis

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Have you ever wondered what a Pro-Forma or a Cap Rate is? Are you trying to figure out what NOI means? Do you want to know how to calculate the various types of ROI, like Cash-on-Cash Return and Total Return?

If yes, then read on…

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We get a lot of posts on the BiggerPockets forums asking about evaluating deals — everything from single family homes to large apartment complexes. Oftentimes, the posters and the readers of the posts have a reasonable understanding of the basic building blocks of a financial analysis, but all-too-often, I find myself (and others) reiterating some basic concepts around deal analysis.

While I love answering questions, I figured it would be easier to document the basic financial analysis process in one place, so that in the future, I can just refer readers here when they have basic questions. Below is a primer that I put together a couple years ago while I was learning the process of financial analysis; while this should by no means be considered a comprehensive review of the subject, it should serve as a good introduction for most readers.

So, without further ado, let’s jump in…

Image(Oh yeah – hey you! To accompany this blog post, I created a free PDF poster you can download right now and print out. It’s called “The 10 Biggest Mistakes Investors Make When Analyzing Rental Properties” and will help you avoid the mistakes that so many investors make when analyzing deals. Don’t buy a bad deal! Avoid these 10 mistakes and get a great investment property! To get the PDF, just click the button below:)

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Have you ever considered buying investment real estate? Are you curious about how you would go about analyzing the financial details of the property you are considering buying? How you would go about figuring out if the property were a good deal or rip-off? The following is a detailed tutorial on how to do a thorough financial analysis of any multi-unit residential rental property you might be considering purchasing.

While different sized properties require more or less analysis then you’ll find here, the information presented in this document is the basis for analyzing any sized multi-unit residential property, from two-unit duplexes to 500-unit apartment complexes. While this analysis will certainly work for single-family rentals (in fact, this type of analysis will work for most investments, in general), the market value of single family homes is generally determined differently than multi-family properties.

The value of single family homes (investment or not) is generally determined by market “comps.” Comps (or “comparables”) are those properties in the same area that have similar characteristics – same floorplan, same number of bedrooms/bathrooms, equivalent garage size, same amenities, etc. So, a single family investment home will generally rise in value if similar homes in the same area are rising in value, and lose value if similar homes in the area are losing value.

Larger investment properties (those with at least two units, and especially those over four units) are priced/valued differently. The value of larger investment properties is directly related to how much income/profit it produces for its owner. So, it’s possible that an apartment building in a neighborhood where house prices are dropping could be increasing in value — especially if the components of the market that drive income are improving. The fact that multi-family properties are valued based on their income potential demonstrates how important good financial analysis of these properties is.

You can’t just compare your apartment building to others down the street to see how much it’s worth. I should also mention that, while this analysis will work for any multi-unit residential rental property, it is not sufficient for analyzing all types of commercial property; for things like office, industrial, or retail space, there’s a lot more you need to know, and I would recommend you find some additional resources. The goal is this document is to teach even the most novice real estate investor how to analyze the financial components of a rental property, but I expect more experienced investors will also find some good information in here.


The first step in being able to analyze the value of a rental property is to understand what factors contribute to property value. In general, good financial analysis involves being able to input a bunch of information about your real estate investment into a financial model, and have that model kick out a bunch of information that you can then use to determine whether the investment is a good or a bad one (and whether it is the right investment for you). Below are the very high level inputs necessary to perform a thorough financial analysis of a residential rental property:

  • Property Details: This is information about the physical design of the property, including number of units, square footage, utility metering design, etc
  • Purchase Information: This is basic cost information about the property you are considering, such as the purchase price, the price of any rehab or improvement work you’ll need to do, etc
  • Financing Details: These are the details of the loan you will obtain to finance the property. This includes such things as total loan amount, downpayment amount, interest rate, closing costs, etc
  • Income: This the detailed information about the income the property produces, such as rent payments
  • Expenses: This is the detailed information about costs of maintaining the property, including such things as property taxes, insurance, maintenance, etc

Getting good data out of your model requires that the information you put into your model is highly reliable and accurate; gathering accurate data can often prove the difference between making the property look great on paper and look horrible.

Pro-Forma vs Actual Data

Remember from the introduction of this tutorial that the value of multi-unit properties is directly related to how much income/profit it produces for its owner. Because of this, it’s often in the seller’s best interest to provide numbers that are more “appealing” than they are accurate; for example, a seller may give high estimates of rental income or neglect to mention certain maintenance expenses to give the impression that the property is more valuable than it is. So, part of your job is to make sure you have the best information available when doing your financial analysis.

How do you do that, you might ask? Well, while you may rely on “pro-forma” data (basically, pro-forma means “estimated”) from the seller to kick off a discussion about a property, you should ensure that before you actually close on the property that you get actual data about income and expenses. You should ask to see previous years tax returns, property tax bills, maintenance records, etc. Hopefully all the actuals will prove similar to the pro-forma data you had previously been given, but don’t be surprised if it doesn’t. Remember, the seller is trying to make a sale, and will oftentimes get creative to make the numbers seem better than they are.

In addition to getting actual data from the seller, you should do your best to ensure there are no surprises if you were to buy the place. For example, when was the last time the property was assessed for taxes? If it was a while ago, and values have increased significantly since then, it’s possible that the property will be reassessed very soon, and property taxes will increase. Remember, even small changes to the income and expense numbers can mean big changes in your bottom line.

Where to find your data

In terms of the input data we discussed above, here is where you should be looking for each of these:

  • Property Details: This information should be available from the seller, but more comprehensive and detailed information can also be obtained from your local County Records Office


  • Purchase Information: Obviously the seller is going to name a purchase price (which will likely be negotiable, of course), but the more important information here will be any upfront maintenance or improvement work that needs to be completed to ensure that the property can (or continue to) meet its income potential. While there may be no extra cost here for properties in good condition, it’s worth having the property inspected by a professional building inspector to ensure that there are no hidden issues or problems


  • Financing Details: You’ll want to talk to your lender or mortgage broker to get an idea (or better yet a letter of approval) about the cost of the loan and the necessary downpayment


  • Income: Details about income should come directly from the seller, but as mentioned above, don’t rely on pro-forma data for final analysis. You can also talk to the property management company currently running the property (if there is one) to get this information


  • Expenses: Similar to income, details about expenses should come directly from the seller (last warning not to trust pro-forma data!) or the property management company currently running the property. This is another place where a building inspector could help warn you about any major repairs that may be coming due in the near future (new roof, new heating/AC, etc)


Example Property

While it will be your responsibility to do your own due diligence in gathering the necessary data when it comes to evaluating real properties, I’m going to take the liberty to create a fictitious apartment building for sale to use as an example for this tutorial. Here are the high-level details on the building (click here to download flyer)… For reference, this is similar to what a seller might provide in terms of pro-forma data on a property for sale (though a good seller would hopefully have something a little more professional looking).

Example Financing

The flyer above contains most of the data you’ll need for this analysis (though again, remember that this is just pro-forma data; you’ll want actual data before signing any contracts). The one thing the the seller can’t tell you is what your financing will look like for your property; that’s something you’ll need to determine with your lender or mortgage broker. For the sake of this example, let’s assume we’ve also spoken with our lender, and have secured a loan with the following properties:

  • Price: As listed in the flyer
  • Improvements: $10,000, as listed in the flyer
  • Finance Amount: 80% of total cost


  • Interest Rate: Fixed 7% over 30 years


  • Closing costs: 2% of total property cost


Based on that here are the calculations we’ll need later in our analysis: Financing Data Now, using this fictitious building and our assumed financing options, let’s jump into our analysis!


It’s now time to jump into the analysis. And one of the cornerstone metrics of RE financial analysis is “Net Operating Income” or “NOI.” In short, NOI is the total income the property generates (after all expenses), not including debt service costs (loan costs). In mathematical terms, NOI is equivalent to the total income of the property minus the total expenses of the property: NOI = Income – Expenses In general, NOI is calculated on a monthly basis using monthly income and expense data, and can then be converted to annual data simply by multiplying by 12. So, now that we know we need NOI, and we know that NOI is calculated using property income and expenses, let’s jump into our income and expense calculations.

Assessing Property Income

Gross income is the total income generated from the property, including tenant rent, other income from such things as laundry facilities, parking fees, etc, and any other income that your property will produce on a regular basis. From our example property, we have 8 units renting for between $525-650 per month, as follows: Rent Roll Plus, we have $200 per month ($2400 per year) in additional income from laundry facilities in the building, for a total monthly income of $4700 (and annual income of $54,000). Because the majority of a property’s income generally derives from tenant rent, it is very important that your income calculations take into account the rent you won’t be collecting due to unit vacancy. In any area, there is some average vacancy rate; the vacancy rate for the property you are evaluating may be higher or lower than the surrounding area, and if it is, you need to decide how you’d like to factor that into your analysis. For example, if building vacancy is listed as lower than average local vacancy, the first question you should ask is whether the data you are looking at is pro-forma or actual? If it’s actual, what is the current management doing to keep the building filled? Is the rent lower than market rents? When do current leases expire? In any regard, you need to determine what you think is a reasonable vacancy rate going forward; my suggestion would be to err on the side of conservative for this, and not assume that your vacancy rate will be any lower than the local average vacancy rate. So, to assess total income on the property, you want to subtract out the income that you likely won’t see due to vacancy. In our example property, only 7 of the 8 units are listed as vacant (which equates to about 12% vacancy), so we’ll go with that for our analysis. So, our total monthly income for this property would be: Revenue With the total monthly income $4160, the total annual income would be $49,920.

Assessing Expenses

Now let’s calculate our total expenses for this property. In general, expenses break down into the following items:

  • Property Taxes


  • Insurance


  • Maintenance (estimated based on age and condition of property)
  • Management (if you choose to employ a professional property manager)


  • Advertising (to advertise for tenants)


  • Landscaping (if you hire a professional landscaping company)
  • Utilities (if any portion of the utilities is paid by the owner)


  • Other (anything else we may have missed above)


Any expenses listed as monthly should be converted to annual, and then we can total our expenses to find the annual cost of operating the property: Expenses So, the total annual expenses for this property would be $12,751.

Calculating NOI

Now that we have our total annual income and expenses for the property, we can calculate NOI using the formula above: NOI = Income – Expenses = $49,920 – $12,751 = $37,169 (the property generates $37,169 per year) While NOI doesn’t give you the whole picture (or even enough information to make any decisions), it is the basis for calculating most of the important metrics in our analysis. In the next section, we’ll examine those key metrics…

Common RE Performance Measurements

We now have all the key pieces of information necessary to determine if this property meets the financial bar you’ve set for making an investment. If you remember from the beginning of this tutorial, I listed a number of key outputs you will want from this analysis. In this section, I will focus on the first two of these – Cash Flow and Rates of Return. In the last section, we learned that NOI was the total income the property produced, not including the debt service (loan) costs. You might have been wondering, “Why doesn’t NOI include the expense cost of the loan, since that will ultimately affect your bottom line?”

Cash Flow

The reason we don’t include debt service in the NOI calculation is that NOI dictates what level of income the property will produce independent of the owner’s particular financing model. Because the monthly or annual debt service amount is going to be specific to the particular financing plan (it will be dependent on the downpayment amount/percentage, interest rate, amortization schedule, etc), if we included debt service in the NOI, then NOI would only be meaningful in the context of that particular financing plan. And because different buyers will no doubt have different financing, it’s important to have an income metric that is specific to the property, not the buyer.

That is why we have the cash flow calculation. Cash flow is equivalent to NOI adjusted for the expense of debt service. Specifically, cash flow is the NOI minus the debt service payments: Cash Flow = NOI – Debt Service As might now be obvious, cash flow is the total profit you will see at the end of the year from this property. As is also probably obvious, the higher your debt service payments (the larger your loan, higher your interest rate, or shorter your amortization period), the smaller your cash flow. If you pay all cash for a property (don’t take any loan), your cash flow will equal the NOI – this is the maximum cash flow on the property.

If you recall from our financing data, our monthly debt service would be $2129 on this property, and therefore our annual debt service would be $25,548. For this property, our cash flow would be: Cash Flow = NOI – Debt Services = $37,169 – $25,548 = $11,621 (at the end of the year, we’d have $11,621 in our pocket from this property) Hmmm, paying all cash will minimize my debt service (it would be $0) which would therefore maximize my Cash Flow. So, if paying all cash maximizes Cash Flow, and if you have the means to pay all cash for the property, why wouldn’t you? Read on to find out…

Rates of Return

Cash flow isn’t the only important factor when it comes to analyzing the property. What is more important than cash flow is rate of return (also known as return on investment or ROI). Think of ROI as the amount of cash flow you receive relative to the amount of money the investment cost you (your “basis”). Mathematically, that would be: ROI = Cash Flow / Investment Basis Obviously, ROI is going to be higher when one or both of the following is true: Cash Flow is higher or Investment Basis is lower. You can see that from the equation above, but it should also be obvious when you think about it: if you can make a lot of money from a small investment, things are good!

What is a reasonable ROI, you might ask. Well, we already know our ROI from several other types of investing vehicles. For example, if you put your money in a high-interest savings account, your return (in this case, your interest rate) is about 5%. In mathematical terms, for every $100 you “invest” in your savings account, you get $4 in cash at the end of the year: ROI = Cash Flow / Investment Basis = $4 / $100 = 4% We know that a savings account will have an ROI of about 4%. A CD will have an ROI of about 5%. And if you do a little research, you’ll find that investing in the stock market will have an average ROI of about 8-10%. So, what would our ROI be on this property? There are actually three ROI numbers that you should be concerned with; let’s explore each of these individually.

Capitalization Rate (Cap Rate)

Just like we have a key income value (NOI) that is completely independent of the details of the financing, we also have a key ROI value that is also independent of the buyer and the details of the financing. This value is known as the “Capitalization Rate,” or “Cap Rate.” Cap Rate is calculated as follows: Cap Rate = NOI / Property Price If there is a single number that is most important when doing a financial analysis of a rental property, the Cap Rate may be it. Because the Cap Rate is independent of the buyer and the financing, it is the most pure indication of the return a property will generate.

Here is the cap rate for our example property: Cap Rate = NOI / Property Price = $37,169 / $418,000 = 8.89% Another way to think about Cap Rate is that it is the ROI you would receive if you paid all-cash for a property. Though, unlike cash flow, where the value is maximized by paying all cash, the Cap Rate is *not* necessarily the highest return you’ll get on a property. This is because Cap Rate assumes that the investment amount is the maximum (the full price of the property), and we learned above that the value of ROI calculations goes up as the investment amount goes down.

So, what is a good Cap Rate? It really depends on the area of the country you’re in, but in general, most areas see maximum Cap Rates in the 8-12% range. And just like the value of single family houses are based on the prices of comparable houses in the area, the value of larger investment properties are usually based on the Cap Rate of comparable investment properties in the area. So, if the average Cap Rate in your area is 10%, you should be looking for at least an 10% Cap Rate for your property (barring other more complex situations and considerations).

Cash-on-Cash Return (COC)

Just like there are multiple measures of income – NOI (financing independent income) and Cash Flow (financing dependent income) – there are also multiple measures of return. As we’ve discussed, the financing independent rate of return (the theoretical return on a fully paid property) is the Cap Rate, and of course there is the real (not theoretical) rate of return as well. This is called the Cash-on-Cash (COC) return, because it is directly related to the amount of cash you put down on the investment.

For example, we discussed that if you took $100 and put it in a savings account, you’d receive $4 per year, or 4% ROI. The COC is the equivalent measure of how much return you would make if you put that $100 into the property. COC is calculated as follows: COC = Cash Flow / Investment Basis In our example, the annual Cash Flow was $11,621, and the investment of cash that we had to apply upfront on the property was $98,000 (this includes the downpayment, the improvements, and the closing costs). So, our COC is: COC = Cash Flow / Investment Basis = $11,621 / $98,000 = 11.86% As this return is directly comparable to our savings account return, we can see that we are getting a better return than either a savings account or in a diversified stock portfolio (albeit with a lot more time and energy spent).

While it’s completely up to you on what rate of return you need to purchase a property, it should be obvious that if you’re getting less than a 10% return on a property, it’s probably not worth your investment (you’d rather take that money and invest in the stock market where you can do a lot less work). But, before you run off and make any final decisions based on COC, consider that the Cash Flow you make on a property isn’t the only thing that affects your bottom line…

Total ROI

In addition to Cash Flow, there are several other key financial considerations that affect a property’s performance. Specifically:

  • Tax Consequences (depending on your situation, you may gain or lose money to taxes)


  • Property Appreciation (you may not be able to predict this, but if you can)
  • Equity Accrued (remember that your tenants are paying off your property for you)

The difference between COC and Total ROI is that COC only considers the financial impact of Cash Flow on your return, while Total ROI considers all the factors that affect your bottom line. Total ROI is calculated as follows: Total ROI = Total Return / Investment Basis, where “Total Return” is made up of the components we discussed (Cash Flow, Equity Accrual, Appreciation, Taxes). Let’s use the following for our Total Return calculation:

  • Let’s assume we would expect a 2% appreciation on the value of the property this year, based on the improvements that we would do upon purchase (2% appreciation is $8360)
  • We can calculate that the equity accrued in the first year of the mortgage is $3251
  • Let’s also assume that for the sake of this example that there are no tax breaks (or extra taxes due) by owning this property.

The Total Return of the property for this year would be: Total Return = $11621 + $8360 + $3251 + $0 = $23,232 And, therefore the Total ROI would be: Total ROI = Total Return / Investment Basis = $23,232 / $98,000 = 23.71% Not too shabby, huh?

Financial Analysis Summary

We now have all the data to assess the value of this property, but keep in mind that our assessment is only for the first year of ownership of this property. In subsequent years, accrued annual equity will increase, expenses may rise (with inflation), rental rates may increase or decrease, depending on the market, your tax situation may change, and a host of other factors may contribute to the return on you investment either increasing or decreasing.

While you can’t predict the future, you should extend your analysis out a couple years, using trend data or demographic data that indicates the direction of the market, inflation, etc. For example, here is a full financial analysis of this particular property, using a spreadsheet I’ve put together to easily create a financial model for any property. As you can see, based on the assumptions that revenue will rise 3% per year (rental rates will increase) and operating expenses will increase 2% per year (inflation, cost of services, etc), our cash flow (and our rates of return) are increasing each year as well. An even more thorough analysis would take into account things like taxation issues, where with the tax deductions you’ll likely receive on the interest portion of your loan, your return may be even better. Image

(Oh yeah – hey you! To accompany this blog post, I created a free PDF poster you can download right now and print out. It’s called “The 10 Biggest Mistakes Investors Make When Analyzing Rental Properties” and will help you avoid the mistakes that so many investors make when analyzing deals. Don’t buy a bad deal! Avoid these 10 mistakes and get a great investment property! To get the PDF, just click the button below:) Click Here to Get the Free PDF Poster!

About Author

J Scott

J Scott is a full-time entrepreneur and investor, living in the suburbs of Washington, D.C. In 2008, J and his wife, Carol, decided to leave their 80-hour work weeks in Silicon Valley to move back East, start a family, and try something new: real estate. Since then, they have bought, built, rehabbed, sold, lent-on, and held over 300 deals, encompassing over $40 million in transactions. J also runs the popular website, is an active contributor on, and is the author of three books on real estate investing. His books, The Book on Flipping Houses and The Book on Estimating Rehab Costs, have sold more than 100,000 copies in the past five years and have helped investors from around the world get started investing in real estate.


  1. Mike McKinzie on

    Excellent article explaining the basics of analyzing a real estate investment. You took what some people make a 200 page book out of and turned it into a easy to ready essay. Great job.]

  2. WOW!! This is a mini-course on the basics of real estate analysis. I am incredibly impressed. I will definitely be sharing this with our readers because there are a lot of people who don’t understand these terms. Great job!!!

    We don’t usually formally do more than a first year analysis but we usually do that analysis with a higher interest rate than what we’re getting and a conservative rent rate estimate plus we build in a 2 to 3 month rent contingency fund into the whole plan to help cover bigger expenses that might come up. The last couple of years our expenses have gone up more than our rents have in most of the properties we own. In some cases our expenses have gone up 5% and our rents have gone down 5% … (amazing how taxes keep going up even when the economy is slower!) so I don’t put much weight on forecasts we do. I think it’s more important to build in a buffer and put in a contingency fund.

    Good post!! Thanks!

  3. James Scholl on

    Very nicely done.

    I have noticed that some of my real estate appraisals on legitimate flipped properties that sold have had selling prices well below market. They sell fast and the investor gets his money out quickly but I wonder if there is another reason to leave that much money on the table ? (I. E. a property that sold for $80000 that could easily have sold for $90000)

    I am also wondering if anyone has done a similar post to J Scott’s above, but on marketing.

  4. Really we’ll done simple language explanation of the ways to analyze different property. I would love to know how to get a copy of the spread sheet you put the link of. Is it in your business plan on your blog.

  5. JScott,
    I didn’t think it was possible to outdo your previous analytical skills and gift for explaining things, but this post really sets you in a field of your own. Extremely well done.


  6. i downloaded the spreadsheet, but cell F43 (equity accrued) is giving me error. is anyone else getting this error? the formula is “=-CUMPRINC(H6/12,12*H7, H4, 1, 12, 0)” and the error is #NAME?

    please let me know..

  7. Thanks for this very informative and easy to read article. I am just curious about why the xls template provided in the comments is for a single family home, whereas the article describes a multi unit property. I am a complete beginner so apologies if this a very simple question. What is the difference between this SFH template and the one used in the article?

  8. J

    Great article. The article gives new meaning to the old adage “… to truly be an expert on something, try to teach someone…”

    You take a very complicated and intricate subject and explain it in a way that makes sense to people who may not have the same knowledge base you do.

  9. Wondering the “equity accrued in first year of mortgage” was calculated. I’m having a problem with the Total ROI because of this. EVERYTHING ELSE was so clearly explained that I’d already started a spreadsheet like the one you have before I’d even seen it.

    Thanks for the information really!

  10. Excellent article. I’ve got one rental property and am looking at buying another. I have been trying to calculate my real return on investment to see if it is worthwhile, and even after reading this article I CAN’T SEE ANY REASON TO INVEST IN RENTAL PROPERTY IN LOS ANGELES, CA IN 2013 (or ever)…

    Maybe you can help me? The best place I’ve found so far was a duplex (with illegal third unit) that had 9 offers and sold for $775k (this month). One unit rented out for $2200 and the other rented for $2000 (so said the real estate agent, but she was a little unclear). The illegal unit was a studio in the basement that rented for $1000. The location is very hipster, and very desireable for walking to lots of shops. The price sold was below Zillow estimate (yeah i know) and similar to its projected price in 2008 (i.e. nearly full recovery to pre-bubble bursting price).

    When I run the numbers, I get a cap rate below 6% and a COC of zero (unless you count the basement studio). Remember, this is the BEST looking investment I’d found in 8 months of shopping. Please help! What don’t I get about LA rental property?

      • Thanks for your response!

        I get it. Appreciation is helped greatly by leverage. But when I assume that appreciation (~3.2%/yr) is about the same as inflation (~3.1%/yr from Case-Shiller data and inflation over the last 100yrs). I find that my total return for most properties peaks somewhere 10-15yrs from date of purchase.

        Does that mean I should sell my property every 10-15 yrs, or is it possible to continue to re-finance and “re-leverage” my investment dollars?

    • Will Moore

      I just attended a 3 day real estate seminar over the weekend & learned about REI for the first time. It blew my mind. I am now looking for a mentor/coach. If you or anyone you know can help me please let me know. I am very dedicated to learning this business & will to put in the work. Thank

  11. Hey folks for those of you wondering about the Equity Accrued calculation I was having trouble with it to but I believe I figured it out @J Scott or anyone else confirm this that would be a great help for those just learning. Since I like to fully understand calculations before I rely on spreadsheets, I did this by long hand month by month.

    First step is you have to convert your APR to a monthly APR. In the example that 7%. .07 / 12 gives you a monthly interest rate of .0058 or rounded to .006.

    Then you multiple your loan balance by your new MIR .006. In the ex that’s 320,000 x .006 giving you $1,920.

    Subtract your interest from monthly debt service and you get your monthly equity accrued. The first month that = $209.

    Do this month by month making sure you multiply the new balance by your MIR. So it looks something like this:

    320,000 x .006 = 1,920 {2,129 – 1,920 = 209}
    320,000 – 1920 =
    318,080 x .006 = 1908 {2129 – 1,908 = 221}
    318,080 – 1920 =
    316172 x .006 = 1897 {2129 – 1897 = 232}

    Repeat for 12 months like above and add up your principal totaling your equity accrued.

  12. Wonderful details and explanations! I was looking for deal summary spreadsheet but after reading this string of information I am well prepared to draw a Summary Table manually. Thank you and I will continue to receive updates.

  13. Can you share your multi-unit spreadsheet. I can see and download the SFH spreadsheet, but I’d really appreciate getting your multi unit spreadsheet in excel form (like the image file you posted here).



  14. Joseph Furmansky on

    Thank you for the crash course. In the paragraph determining “vacancy rate”, you wrote, “In our example property, only 7 of the 8 units are listed as vacant (which equates to about 12% vacancy),” I believe you meant to write, “only 1 of the eight units…..” or “only 7 of the 8 units are rented”.

    I would love to have a copy of your spreadsheet, so that I can plug in my data.

    Thank you

  15. “So, to assess total income on the property, you want to subtract out the income that you likely won’t see due to vacancy. In our example property, only 7 of the 8 units are listed as vacant (which equates to about 12% vacancy), so we’ll go with that for our analysis. So, our total monthly income for this property would be:”

    This should be “only 1 of the 8 units are listed as vacant” I”m sure others have noted this but i figured I’d mention it….

  16. J Scott,

    I was able to find your SFH Rental analysis but couldn’t locate the example commercial/multifamily one used in this post. Do you have a template that could be uploaded here or sent to me directly? This post was excellent!

  17. Excellent article J Scott! I’m just getting my feet wet in investing and this helped tremendously in understanding and familiarizing myself with all the terms I need to know! Great Job!

  18. Great article. Thank you for spending the time to put it together.

    One question: Why is the summation of Cash Flows not considered in the total return? I fully understand including the accrued equity, appreciation, etc. but do not understand why the total return in calculated based on only the particular year in question. For example, in Year 10, I would use the the summation of Cash Flows from Year 1 – 10, as opposed to just the cash flow in year ten. Further, you could even place an opportunity cost on these cash flows of anywhere between 2 – 7% if you anticipate to invest in CD, stocks, etc.


  19. Cristina Abellar on

    And who says nothing is free anymore? The information J Scott had diligently put together in this post is PRICELESS! He made it clear & simple to understand. I found Bigger Pockets because of your 123flip site, thank you! You are a true blessing to mankind, more power to you!

  20. Anthony Armstrong on

    Pretty sure this was the most beneficial, and concise explanation of every question that has crossed my mind when I have been on the BP forums. Combining the explanations with instant examples helped push the point home. I will definitely share this information with friends and go back to it on a regular basis to make sure I am understanding the important parts of doing a financial analysis.

  21. Mike Hernandez on

    Hi J, I want to Thank you for taking time in writing this article!! The information presented here cleared up a lot of questions my wife and I had about analyzing deals. Thanks again J!

  22. When you click on the link at the end of the article labeled ” here is a full financial analysis of this particular property” it shows a picture of the spreadsheet for multi family and has the “key values block at the top right hand of the sheet. Does anyone know where I can find “that” spreadsheet. I am assuming J Scott created it. I know that the SFH Rental Analysis is close to that spreadsheet and I have that downloaded. Just wondering if anyone has the one listed in the article. I don’t know what it would take to create the multi family one and have the formulas to create the key ratios in the top. The one in the article is more streamlined for what I want to do. Thanks for all your help.

  23. Thank you for taking the time to consolidate the fundamentals of investment analysis on multifamily properties. This will be very helpful for my soon to be first deal. This post has lead me to support you and buy your book.

  24. Excellent article! Thanks @J Scott!

    If anyone has an answer to this question:

    – For ROI, Appreciation in the example was calculated at 2% because of the of the $10,000 in improvements.
    – Since value of the MFR is calculated based on income it produces, are we assuming that the 2% ($8,360) will be due to increased rents we collect? ($8,360 / 7 Units rented (12% cap rate) / 12 months = $99 / extra per door)

    Also for NOI:
    NOI = $49,920 – $12,751

    So basically, expenses = about 26% (12,751 / 49,920)

    I get the calculation but I’m wondering how it’s so different from the 50%-60% Rule that is often quoted and if that’s typical for a MFR?

  25. This is a great post. Really informative. I’ve used this post to evaluate first a 4-unit mf property that I had under contract, but backed out of when I could not make the numbers work, and now a single family property that is under contract and closing in the next 30 days. Thanks!!!

  26. J
    Great post! I guess it kind of weird but I love doing the numbers and analyzing deals bc it can provide a much clearer picture on what a “good deal is”. I also purchased your book to learn more and support you and the Biggerpockets community.

    Be well,

    Willie Bonati

  27. Where did you get 3251 on total ROI. How does this apply if I pay cash for entire purchase and then roll in to cash out refi for same 50K?

    Thanks so much for the help,

      • Ok great, thanks Scott! Just curious, Is the multi family spreadsheet that your article is based on available for download somewhere? I see lots of people have asked the same question and was just wondering if it is possible to get it.
        Thanks! looking forward to your upcoming event in NYC

  28. Thank you so much for providing such a clear breakout of the terms/steps involved. I am fairly new to BP and have been looking for a source as a one-stop-shop — you definitely delivered!

  29. J. Scott, I know this is an old article, but I wanted to post how much I liked it. I also really liked your 2 books on flipping houses and estimating rehabs. Thank you for taking the time to write this. I know you were doing extremely well in Atlanta then branched out into Milwalkie. I am curious where your main focus is now.

  30. ABubaker Sirur on

    Thank you for your blog. It was very helpful in understanding the process of financial analysis and ensuring that there is profit in the the property prior to obtaining it. Thanks, again!

  31. Gloria D. Wilson on

    Wow! Wonderful tutorial – I’m going to go back thru it again. There are three triplexes I am considering – and definitely want to make sure I totally understand how to do my due diligence – What I really love about your presentation is that it’s in plain English -broken down so simply, yet thoroughly so that I can comprehend and apply what you’ve presented.

    Thanks so much for this.

  32. James Moore

    Hi J Scott,

    Thank you for this guide! I just wanted to confirm with you that this guide can be used to evaluate single-family homes? You mentioned at the beginning that the value of multi-family properties is determined by income potential and single-family homes is determined by comps. Would the above analysis be altered in any way to reflect a potential single-family deal? Or, could you use the same metrics to evaluate a single-family property? I’m a newbie— Thanks!

    • Tia Rubadeau

      Thanks so much! As I’ve been listening to the podcasts I’ve been making mental notes about the things I really need to develop a better understanding of. This lays a lot of it out there for me. Tremendously appreciated!

  33. Jonathan Bridgers

    Thanks for taking the time to explain the fundamentals of analyzing a potential deal. Building upon these basic building blocks, I hope to at least eliminate ‘deals’ that do not qualify and to continue searching for those that do. Thanks so much!

  34. John Nguyen

    I actually read all the comments, ’cause I too was confused on how our generous blogger, Mr. J Scott, got the figure $3251 for equity accrued. Seems like a lot of people were confused, so I’ll post what I believe is somewhat of a good answer. I used the mortgage calculator at to add up the first year’s equity. You can find it here at this link, prepopulated with his example’s figures:

    Thanks, J Scott. And good luck to everyone else! I hope my 2 cents helps!

    • John – I just finished reading all the comments. I was hoping to find info. on equity accrued … which i did of course. When I used the formula for equity accrued ( debt payments made for the year minus interest paid for the year ) I came up with $ 3,148.

      But now, thanks to your 2 cents, I can use the mortgage calculator at I just clicked on your link. Thanks! You just helped clear the last concern I had about using the Analysis Worksheet accurately. I created it last night on excell and plugged in formulas wherever I could to cut down on errors.

      • John Nguyen

        Hi Darrie,
        I’m glad I could be of help!
        How did you figure out your version of the interest paid for the year? I know that the debt payments is 25,548 (from 2129×12), but how did you figure out the interest paid for the year (or get close to it) to end up with your version of the equity accrued?
        I worked backwards, and took the total debt payment and subtracted the equity figure that J Scott gave us (22,548-3251), which equals 22297, but I could not find that figure anywhere in the article or know how to get calculate that figure. It says “?We can calculate that the equity accrued in the first year of the mortgage is $3251.” Where did this calculation come from? I had to use the mortgage calculator to figure it out! But I was hoping someone would tell where they got the numbers to calculate it…
        J Scott? Any help, please? Thanks!
        – John

  35. Brandon Harnsberger on


    Great break-down & example – THANK YOU!

    This is my first time using the above to analysis a property that we purchased.

    My Question is….

    How does rate of appreciation (3% used in example above) effect the value of Multi-Family if the value is based on Rents (NOI) and/or Cap Rate and not on general market appreciation?

    Would it be correct or incorrect to add an average of 3% Appreciation?

    Any input or advise on this would be appreciated.

    • J Scott

      Brandon –

      You can certainly factor in appreciation if you like. But, keep in mind two things:

      1. Appreciation isn’t guarantee, so make sure you have a reason for the number you choose and understand that it may not materialize.

      2. If you’re going to account for appreciation, you should probably account for inflation as well. So, modify your expense numbers as well.

  36. Elliot Larkin

    Thank you so much Josh, you’ve summarized a course I took with sweet brevity and clarity! One question: if the Total Return = $11621 + $8360 + $3251 + $0 = $23,232 with a 20% downpayment. What would the total return look like if one were to pay for the property 100% in cash? Would there be no equity accrued since you already own the house outright?

  37. James Burgess

    One thing I haven’t seen is how to calculate total return on investment when I buy and hold, but I also had a significant increase in market value through initial improvements and buying under market value. Basically, I buy for 40K, put 10k in improvements, and the new market value is 100k, but I hold with annual appreciation of 2%. Is that an irrelevant number or what is a better number to determine when it is time to sell?

  38. J Scott

    Hey James,

    Remember that no single calculation is going to give you the entire financial picture. Cash-on-cash return will tell you how well the property might do in a particular year, for example, but won’t tell you how well it will do over lifetime of the investment.

    In your example, the equity you get when you purchase and rehab is trapped until you either refinance or resell, so that’s something that you’ll have to look at the entire investment return to see how it impacts you. For things like that, using IRR is my personal favorite metric.

    Here is an example:

  39. Megan Carpenter

    As holding multi-family units is my eventual goal, I found this article immensely helpful. Not only did it allow me to mentally prepare for how I will conduct my analysis, but it illuminated the way in which I am currently looking at numbers for SFH deals I am working on. This article was incredible helpful as a beginning investor using terms and the derision of those components breaking the content into an accessible example.

  40. Jacob Sanders

    Wow! That was an awesome article! Analyzing property deals is something that I had been wanting to get more information on because my wife and I are new to the world of REI and are looking at properties for our first flip or rental. This is definitely being printed and added to my collection of resources!

  41. Chad Gross

    This was a great article, but I am a little confused. According to the equations ROI and COC return are identical:

    ROI = Cash Flow / Investment Basis

    COC = Cash Flow / Investment Basis

    Based on the two articles below it would seem that actually ROI = Cash Flow / Property Price. Meaning ROI = COC only in an all cash investment. Was the article mistaken or are ROI and COC in fact always identical? If this was a mistake can we get the article updates so others are not unwittingly misled?

    • J Scott

      Hey Chad,

      A couple points of clarification:

      – First, ROI is a very generic term. While there is a specific definition, in real estate investing, there are about a dozen different equations that you could refer to as ROI and they’d all provide different results. For that reason, I highly dislike the term — it’s too ambiguous.

      – Generally speaking, when people talk about ROI in buy-and-hold real estate, they’re referring to cash-on-cash return. So, the two are typically used interchangably.

      – When I say “Investent Basis” as the denominator in the equation, I’m talking about the total cash the investor has invested in the deal, not the “basis” of the property from an accounting standpoint. So, if you had a loan, the investment basis would be reduced.

      But, in general, yes, COC and ROI are the same thing…let me know if that didn’t clarify…

      • Chad Gross

        Fair enough. I just want to make sure I understand what I am talking about (or at least sound like I do!). It seems that ROI as a term should just be avoided in favor of the more explicit COC so I will stick to that. Thanks for the prompt reply and the very helpful article!

  42. Eduardo Aguilar

    Hello, I’m new here, just getting started in this investing in real estate world.
    thanks for the excellent article. Also thanks for sharing your spreadsheet.

    Just curious, how do you come with an appreciation of $8360 (2% of property value, if I understood correctly). If property value is $410k ($400k+10k), 2% appreciation should be $8200.
    It seems like you took 2% of $418k which would include the closing costs. Am I missing something, or why did you include the closing cost as part of the property value?

    Thanks again and I appreciate your time.

  43. Justin Cole

    There are a ton of grammatical errors in this article as well as the “7 out of 8 Units are vacant” piece that someone else mentioned before. I am surprised as the extremely poor editing and review of this article.

    That being said, there is good data, just sloppy writing.

  44. Nathan W.

    LOL at @J Scott’s last comment. Since the comments to this post are still alive, I thought I would weigh in.

    1. Awesome refresher. It is always good to review the basics every now and again IMO. This is a very good article for any fledgling investor looking to get into the buy and hold market.

    2. Man 4% rates from savings account? My how the world has changed since 2010 lol

    Thanks for the article. BTW stayed up all night last night reading your New Spec Diary project. I had intended to just start it and go to sleep, but of course that didn’t work and I read it through in one sitting. Great stuff man.

  45. Eddie Atkinson

    I agree. This is a great article. It definitely makes getting started a lot less intimidating. I also just read “The Book on Flipping Houses”, which I would recommend to anyone even remotely curious about the flipping process. Another great read. Thank you!

  46. Kin Hei Lam

    Hi J

    In the ROI example with the high interest bank account. You have the interest at 5%. In the example you put $100 into the account and said the return should be $4. From a purely mathematical stand point shouldn’t the return be $5 on a $100 investment at 5%?

    Is this a mistake or are there some weird banking rules that I don’t know about?


  47. Charlie Corn

    Good stuff. I’ve been developing my own analysis tool, and this is immeasurable in helping. I have one value I cannot understand the formulation: Equity Accrued. Does this value coincide with the amortization of the mortgage amount? How can I calculate the amount, what’s the baseline formula? I have a amortization schedule included in my analysis tool, so I can see any month of any year if needed.

    Thanks in advance!

  48. german buendia

    The equation to calculate the equity accrued is as follows:
    First you have to find how much you will owe on your mortgage after one year =-FV(.07/12, 12, -2129, 320000)
    the total of that equation is = 316749.41
    320000-316749= equity accrued.

    I hope this helped a little.

  49. It’s all been said prior but thank you for taking the complex terms and simplifying them so that it is concise and easy to digest. Great easy examples to follow. Very impressive!

  50. Hrund Arnadottir


    I’m a newbie and I just found this article!, so well explained!! I am way excited to go gather all the numbers I need and then use it. But I have a question…maybe a silly one but still; I live in Europe, in Berlin Germany to be exact and have to insert everything in €, does that matter at all or can I change the spreadsheet. Also, where can you find the spreadsheet for Multifamily houses?

    Thanks so much!

  51. nick mcgowan

    I was first introduced to these concepts or measurements about 12 years ago when I read Rich Dad Poor Dad and Real Estate Riches by Dolf De Roos. Unfortunately, I wasn’t ready to jump in to REI like I am now. Great article!

  52. Andy Krzanowsky

    @J Scott

    Thanks so much for this… I really was the first piece that allowed me to factor in my equity gain each year… I had found a simple cashflow and cash on cash return from Brandon Turner but this was what I needed.

    Now I just need to figure out what my next step is moving forward to another property.

  53. Chris McDonald

    Hi, I love the article! Thank you so much for putting it together!

    I have one question. Its a small point, but in the “Assessing Property Income” section, it seems the laundry income ($200/month) is left out of the calculation of annual income. Was this done on purpose? (Specifically, $4700 x 12 months = $56,400. Not $54,000.)

  54. Jennie Ortiz

    Thank you for sharing this wealth of information. I am no doubt new and investing a lot of time learning as much as I can about the investment business and appreciate this site and the education and the great people.

    Thank you again,

  55. Very useful share..
    If you’re looking into real estate investments, you likely want to earn wealth on real estate based on risk you are taking, while minimising the amount of time you need to spend attending to the property.

    In order to accomplish this, you need to make some smart choices upfront when buying investment property.

  56. Benjamin Molina

    J thank you SO MUCH for this article! I’m green but here’s my question: When calculating Total Return, can I add the mortgage interest deduction I would receive from my W2 income and include it? (i.e, I pay mortgage interest of $12,000 and assume a 25% tax rate, therefore add this $3,000 to my total return each year? Obviously it would be more conservative to leave it out, yet if there were negative tax consequences of the deal I would no doubt include it. Anyone have thoughts on that?

    Thanks again for the spreadsheet too! I’ve recreated it and included an amortization spreadsheet on the next sheet in order to easily populate the “Equity Accrued” boxes. This will also prove useful if/when I include any mortgage interest deduction.

  57. Benjamin Molina

    Another question: in calculating Accumulated Return can I include my down payment to account for the amount of equity I “purchased” up front? There must be an accounting method to enable to comparisons of different investments.

  58. Good article with transferable advice for us in the UK. One thing I didn’t understand was the total cost in your initial table was $118,000 not $98,000 – why was that?

  59. Mark Elkhill

    Great info in the article. However, I need some help. We have a Lead Manager beta tool to help us analyze properties. I am trying to figure it out and am wasting a lot of time. Is there a webinar or tutorial somewhere that will explain how to use it? Thanks…..

    Be Great~!
    Mark Elkhill

  60. Ma Bu

    Thanks for this. This was very useful.

    I noticed that in the image of the excel you posted there is a little section for selling costs (in your excel at 7%). Would it be possible for you to show that part of the analysis, please?


  61. Nathan Moore

    Great Article!! thanks so much!

    I am curious though as to why the ROI calculation (ROI=cash flow/investment basis) uses the cash flow, but the Total Return calculation uses NOI. On the total return calculation, which includes equity accrued, wouldnt it also be prudent to include the cost of the debt servicing?

    Thanks again!

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  63. Josh Smalley

    Newbie here and something is just not clicking for some reason. In this post, the ROI and the COC are the exact same formula. Elsewhere I read, I see these as two separate numbers/calcs. What on earth am I missing here? Are they synonymous or not?

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  65. Gregory Massi

    This is a great article – i have a question relating to the Cash on Cash Return. Should the taxes you pay at closing should be excluded from the “initial investment” as this is already being captured in the “cashflow”? To clarify, these are taxes that are being escrowed for future payment..not back taxes.

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  67. Michael P. Lindekugel

    “As might now be obvious, cash flow is the total profit you will see at the end of the year from this property”
    No, cash flow is not total profit. Net Income or profit in the statement of operations measures earnings and has nothing to do with cash flows. Earnings can include accounting and tax treatment deductions that do not involve cash. The cash flow statement provides an accounting of aggregate data regarding all cash inflows received as well as all cash outflows. This does not include phantom GAAP accounting or tax treatment items deducted from Net Income.

    I don’t believe capitalization rate is the gospel of financial analysis for investment in rental property. Using the in place GSI compared to market GSI a revisionary capitalization rate can be calculated to provide some idea about the subject property performance compared to other properties in the market. as an investment analysis tool it is extremely limiting. Capitalization rate is an index. An index is only valuable when compared to other data points in the market.

    Capitalization rate fails to account for GAAP accounting and tax treatment items to calculate cash flows and ROI using discounted cash flow techniques such as IRR and NPV. Both of which measure the compounded interest rate of the cash flows. Countless times I find investment opportunities with good in place or revisionary capitalization rates and low Internal Rate or Return (IRR). key is finding investment opportunities with discounted cash flow analysis intrinsic value higher from than the sales price. You can’t do that with capitalization rate. many intrinsic value opportunities have not so good capitalization rates.

  68. Joel Montano

    Wow, this information is absolutely wonderful. There is so much information in this post, that I was forced to write notes, thank you. I’ll be sure to check out your books, definitely a great mentor for newbies like myself.

    Coming in late has its benefits due to the reservoir of Q&As that I can go over.

  69. Diana Duncan

    Nice article J Scott, thanks for sharing. I’ve never been a fan of mind boggling spreadsheets, too many numbers, although I realize that numbers are an essential part of a successful RE Investor’s tool kit so I embrace them wholeheartedly.

  70. Mark A Rose

    My wife and I currently own a home in a great neighborhood. We purchased the house 5 years ago but had to move due to work. We have been renting the house for 2 years with a net income of approximately $4000 per year (-mortgage/management/maintenance). Our house recently appraised for about 100k more than we paid. My question is, should I sell for a net profit of 100k or continue to rent? My thought is if i sell and pocket 100k cash, I could use that money to possibly purchase two or three rental properties in the area and possibly increase my total cash flow.

    Or should I continue to rent and try and refinance to come up with additional cash to invest with? Thanks.

  71. Justin Johnson

    J Scott, I do have some questions about this article. I have read, and re-read (about 4 times now), this article and I am currently using an almost identical analysis worksheet at the moment.

    My questions are:
    1) You are calculating the utilities at the annual level and not monthly, is this just an average utility cost figure that you come up with?

    2) Why are the utilities being calculated on this, are you your own tenant (househacking) or paying utilities as a luxury for your tenants?

    3) Is there a different way to analyze a property for househacking to find a deal?

    4) How in the world do you keep your annual utilities so low?! lol

    This has been one of my favorite and one of the most helpful articles I have read since joining BP and I am really trying to dig into the analysis part right now. I know I can use the calculators on BP to do the analysis for me, but I still believe in *knowing* what’s going on behind the numbers even when I use a calculator, I want to be able to do them by hand if I have to. Thank you so much for this great article!

    • J Scott

      Hey Justin,

      These numbers are just for example purposes. That said, I often don’t pay utilities for my tenants, but do have to pay utilities between tenants, when the property is empty. If I have a one month vacancy every 18 months, that’s a few weeks per year of utilities on average, for each unit. Depending on the time of year, that can still be a couple hundred dollars per unit.

      As for house hacking, use the same analysis, but subtract out whatever income you’re not receiving from the rental income because you’re living in that unit.

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