What is the best analysis formula or combination of formulas that you use?

Question

What is the best real estate analysis formula or combination of formulas that you use?

Is it IRR?

CoCR?

Cap Rate?

NOI?

Is it appreciation?

Whatever you find useful, share your formula and why it is the best. Maybe it will become my favorite.

James Jones · Answer

Bryce, I keep it to three checks, in this order. First, the 1% rule on the all-in: monthly rent should be about 1% of purchase plus rehab. For a 3-bedroom or larger on Section 8, I need rent of $1,395 to $1,950. Second, all-in versus ARV: I buy single-family under $100,000, and ARV from sold comps is usually $180,000 to $265,000. If the all-in does not leave room, I pass. Third, the refi: will it work on a DSCR loan at 70 to 80% loan-to-value? That is the exit, so I underwrite it from day one. I run the same three checks at 236 doors. If a deal fails any one of them, I do not need a fourth formula. What is your market and what does your typical all-in look like?

Andrew Palumbo · Answer

One ratio nobody has mentioned yet is DSCR, debt service coverage. It's net operating income divided by your yearly loan payments. If it's 1.0, the rent just covers the mortgage and expenses with nothing left over. Many lenders want around 1.2 or more, and DSCR loans are approved on it, so it's worth knowing even if you don't use it to decide. I like it as a safety check next to cash-on-cash: cash-on-cash tells you the return on your money, DSCR tells you how much room you have before a bad month means paying from your own pocket.

Divin Kanyama · Answer

@Bryce M. My vote would be cash-on-cash return paired with a downside test—not one magic number. The formula is annual pre-tax cash flow ÷ total cash invested × 100%. I’d calculate cash flow after debt payments and a realistic capital-reserve allowance, and include closing costs and initial rehab in the cash invested—not just the down payment. That gets at what matters to me: what cash the property produces relative to the money I’ve actually committed.

I’d build that from NOI—income after vacancy and operating expenses, before debt service and capital expenditures—then use cap rate (annual NOI ÷ purchase price) to compare similar properties before financing. IRR adds the timing of cash flows and eventual sale proceeds, but I’d be careful about how much the result depends on the exit assumptions. I’d model appreciation separately rather than rely on it to rescue weak cash flow. My favorite test would be whether the deal still works with lower rents, more vacancy, and higher repairs. A great-looking return wouldn’t mean much to me without room for things to go wrong.

Matthew Morrow · Answer

@Bryce M. no single formula for me, it's more an order of operations. Purchase price first, because overpay and the rest can't save you. Then rent against real expenses: taxes, insurance, vacancy, repairs, and a capex reserve, not the seller's numbers. Then cash flow after all of that, and on a BRRRR, what's left in the deal after the refinance. Cap rate is a quick way to compare similar buildings, but it says nothing about what the rehab will cost. IRR and appreciation I treat as extras, not a reason to buy.

Trevor Rice · Answer

I flip and wholesale, so my formula is boring: ARV times 70%, minus repairs, minus my fee. If the number that comes out is lower than what the seller wants, I move on. For rentals I just look at monthly cash flow after vacancy, repairs and a real property manager fee, because the pretty ratios all fall apart when the roof dies. Pick one that tells you a yes or no fast and stress test it with worse numbers than you expect.

Bryce M. · Answer

Then what do you think? Those were just potential examples.

Joe Villeneuve · Answer

None of them. The closest two would be CAP Rate, but only for commercial, and CoCR, but that's only applicable for the first year of ownership.

IRR is an illusional number that can be adjusted as needed to make a bac deal seem good.

NOI is only a part of a longer formula to calculate cash flow".

Appreciation is either a prediction (a wish), or a conclusion after the fact. It works as a post analysis number but isn't valuable as a before purchase number since it is based on how past appreciation will impact the future. The best predictions don't always come out true. If they did, there would be no stock market, and no gamblers.

What is the best analysis formula or combination of formulas that you use?

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