Despite what many of us math-allergic folk would prefer, real estate does involve some math. Luckily, most of the formulas are simple and straight-forward. In fact, if you can master the calculations below, you should be just fine.

## The Top 8 Real Estate Calculations Every Investor Should Memorize

### Cap Rate

Net Operating Income / Total Price of Property

Example:

NOI: \$25,000

Total Price (Purchase + Rehab): \$300,000

\$25,000 / \$300,000 = 0.083 or an 8.3 Cap Rate

This calculation is mostly used for valuing apartment complexes and larger commercial buildings. It can be used for houses and small multifamily too, but operating expenses are erratic with houses (because you don’t know how often and how bad your turnovers will be).

Related: The Investor’s Complete Guide to Calculating, Understanding & Using Cap Rates

You want to have a cap rate that is at least as good, preferably better, than comparable buildings in the area. I almost always want to be at an 8 cap rate or better, although in some areas, that’s not really possible. And always be sure to use real numbers or your own estimates when calculating this. Do not simply use what’s on the seller-provided pro forma (or as I call them, pro-fake-a).

### Rent/Cost

Monthly Rent / Total Price of Property

Example:

Monthly Rent: \$1,000

Total Price of Property (Purchase + Rehab): \$75,000

Rent/Cost = \$1,000 / \$75,000 = 0.0133 or a 1.33% Rent/Cost

This is a great calculation for houses and sometimes small multifamily apartments. That being said, it should only be used when comparing the rental value of like properties. Do not compare the rent/cost of a property in a war zone to that in a gated community. A roof costs the same, square foot for square foot, in both areas. And vacancy and delinquency will be higher in a bad area, so rent/cost won’t tell you what your actual cash flow will be. The the old 2% rule can lead investors astray, and they shouldn’t use it. But when comparing like properties in similar areas, rent/cost is a very helpful tool.

According to Gary Keller in The Millionaire Real Estate Investor, the national average is 0.7%. For cash flow properties, you definitely want to be above 1%. We usually aim for around 1.5%, depending on the area. And yes, I would recommend having a target rent/cost percentage for any given area.

### Gross Yield

Annual Rent / Total Price of Property

Example:

Annual Rent: \$9,000

Total Price (Purchase + Rehab): \$100,000

Gross Yield = \$9,000 / \$100,000 = .09 or a 9% gross yield

This is basically the same calculation as above but flipped around. It’s used more often when valuing large portfolios from what I’ve seen, but overall, it serves the same purpose as rent/cost.

### Debt Service Ratio

Net Operating Income / Debt Service

Example:

NOI: \$25,000

Annual Debt Service: \$20,000

Debt Service Ratio = \$25,000 / \$20,000 = 1.25

This is the most important number that banks look at and is critical for getting financing. Generally, a bank will look at both the property’s debt service ratio and your “global” debt service ratio (i.e. the debt service ratio of your entire company or portfolio).

Anything under 1.0 means that you will lose money each month. Banks don’t like that (and you shouldn’t either). Generally, banks will want to see a 1.2 ratio or higher. In that way, you have a little cushion to afford the payments in case things get worse.

### Cash on Cash

Cash Flow / Cash In Deal

Example:

Cash Flow (Net Operating Income – Debt Service): \$10,000

Cash Into Deal: \$40,000

Cash on Cash: \$10,000 / \$40,000 = .25 or 25%

In the end, this is the most important number. It tells you what kind of return you are getting on your money. In the above example, if you had \$40,000 in the deal and made \$10,000 that year, you made 25%. This is a critical calculation not only when it comes to valuing a property, but also when it comes to evaluating what kind of debt or equity structure to use when purchasing it.

### The 50% Rule

Operating Income X 0.5 = Probable Operating Expenses

Example:

Operating Income: \$100,000

Operating Expenses = \$100,000 * 0.5 = \$50,000

This is a shorthand rule that I judge to be ok. It is for estimating the expenses of a property. Whenever possible, use real numbers (i.e., the operating statement), but this is good for filtering out deals that don’t make sense. Just remember, a nicer building will have a lower ratio of expenses to income than a worse one and other factors, like who pays the utilities come into play. Don’t simply rely on this rule.

Related: Rental Property Numbers so Easy You Can Calculate Them on a Napkin

### The 70% Rule

Strike Price = (0.7 X After Repair Value) – Rehab

Example:

After Repair Value: \$150,000

Rehab: \$25,000

Strike Price = (0.7 X \$150,000) – \$25,000 = \$80,000

This is another rule like the 50% rule, although I think this one is better. This one is for coming up with an offer price. Always crunch the numbers down to the closing costs before actually purchasing a property. But if you offer off the 70% rule, you should be just fine as long as your rehab estimate and ARV (after repair value) estimates are correct.

## Comparative Market Analysis

Unfortunately, there’s no real calculation for this. It’s mostly used for houses, and it’s all about finding the most similar properties and then making adjustments so that a homeowner or investor would find each deal identical. The MLS is by far the best for this, but Zillow can work too (just don’t rely on the Zestimate). For a more detailed explanation, go here.

In the end, the math isn’t that bad. No rocket science here luckily. Instead, there are just a few handy calculations and rules to evaluate properties before purchase and analyze their performance afterward. Memorize these, and you should be fine.

Investors: What formulas do you use to analyze your deals? Any calculations you’d add to this list?

Let me know with a comment!

Andrew Syrios is a real estate investor in Kansas City and a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.

1. Great list, Andrew. We use all of the ratios, calculations, and rules of thumb you mentioned!

2. Great article, Andrew, thanks for putting all of these in one place!

3. Good summary! I was recently talking with my son (business guy with Nike) and his question was “what is your return on equity?” From the metrics you presented, I’m doing fine. But when I looked at my Return on Equity, I was a bit stunned! As a buy & hold guy, the longer I hold something the higher my cash flow, but without reinvesting the equity the lower my return on equity! Any thoughts on the value of this formula and how to balance that with other formulas?

• I’m definitely the most interested in my return on cash, but yes, as a buy and hold guy as well, as you pay down more principal, your return on equity will go down. I’m not as concerned about this for two reasons 1) your equity continues to go up, especially as you get further into the loan and your principal paydown accelerates and 2) the transaction costs involved in moving to another investment. Overall, my strategy is to grow the amount of equity I have first and foremost, so I’m OK with having a bit lower return on equity as everything else is good.

• Andrew, a question on all of these calculations. Assuming the BRRR strategy is being used, the total purchase price on these calculations, is going to be the refinance total, correct? Example: I bought a property for \$10K, rehabbed \$60K for a total of \$70K, but plan to refi for \$100K. I’m basing the total purchase price on the \$100K, correct? Thanks. Great article.

• I think as a buy and hold investor, especially in an area where significant appreciation is happening, it’s worth calculating return on equity.

I re-evaluate my properties yearly because, while my cash on cash has stayed good the properties have often appreciated so much that my return on equity sucks. I need to re-allocate (cash out refi or sell and buy something else).

Some of my units are in an area that really hasn’t had significant appreciation in ten years. I never do return on equity for them, because nothing has really changed. YMMV.

• I would agree. It’s a good calculation to have, it’s just not as important as the others to us. If I do a follow up post, I will add it.

4. Andrew,
Nice presentation.

5. Great article! The helped me to better understand some terms, calculations and when to use them correctly. Thanks a bunch!!!

6. Excellent Article. Thank-you.

7. Simple and straightforward. This is useful for newbies as well as a nice refresher for current landlords/investors. Thanks for sharing.

8. I’m a newbie here and first I want to say thank you for the great article. I’m not in real estate investing yet. My thought is how do successful investors get around the day to day hassle of bad tenants and their drama? It seems like as an owner of many properties it could make one’s life hell. I know a woman who had her tenant put a restraining order against her for giving her an eviction notice. She couldn’t do anything about it and had to go to court several times.
I am hesitate to move forward due to this issue. I was thinking that business properties may be less hassle, any thoughts on this?

• Hire a property manager

• Lisa I have accumulated 23 units in a town that has its problems with jobs and is in the Rust Belt. I managed them myself for about 5 years. I was proud of the fact that I could do it as an absentee landlord, then I did my taxes carefully. The loss column on unpaid rent, clean up, evictions and the hassle factor was very high. These are exactly the problems that a manager would influence. I decided to hire a manager for the 3 buildings that had the most turnover (12 units) and I did the right thing. I pay 10% but the services provided (notices, checking interiors, a firm presence, follow up on repairs) are leaving me with time to think about expanding rather than the day to day hassles. I believe I have more money and less issues right from the day the applicant is interviewed.

• Just saw this post when the article was reposted, so I figured I answer it despite being very old. The most important thing is screen very heavily up front. The best way to not deal with bad tenants is to not accept them. Also, don’t give endless payment plans. Have a firm policy they must adhere to. And of course, if you can either hire a third party management company or hire a manager to work for you, that takes a lot of the burden off.

9. This is excellent, thanks for putting in real examples and refreshing my memory.

10. Thanks! This is very helpful. One question regarding Debt Service Ratio:
– if DSR = (Annual NOI/Annual DS), then isn’t DS being counted twice?
– I was under the impression that NOI = (Gross OI – OE) and…
– that OE includes DS.
Should DS not be included in OE or am I misunderstanding something?

• In answer to my own questions, OE does not include DS.

11. Great article!
I know most of these, but learned some new stuff for sure. I also use some additional metrics, the break even ratio and reserve ratio.

BER = (Debt Service + Operating Expenses) / Gross Operating Income.

The objective is to have this number as low as possible, but no higher than 85%. If the BER=100% then that is like having a DSR=1.0.

The other metric is my reserve ratio or number. This is actually one of my top metrics that I calculate. I want to make sure that when I purchase the asset or get into any kind of deal that I (or the deal) have/has sufficient reserve capital if something goes sideways I’m covered and don’t have to come more out of pocket. This is a hard number to pin down in a rule, but depending on the deal, I like to have 3-6 months minimum reserves if not 12 mo of reserves. Having reserves which are then replenished from the gross income to a given % or level can heal a lot of ill’s in a deal.

12. All important calculations. While it’s not easy to calculate and talk about in a blog post, I would argue that IRR is really the most important calculation – more important than CoC (because it takes value of equity and sale costs into account), more important than ROE (because it assumes any free cash flow is re-invested), more important than anything else (because it accounts for the variables related to your strategy with the property).

I think the post would be improved if – even if it didn’t cover the topic in detail – it at least pointed people at how to start thinking about it.

• IRR would probably be more important to us if we flipped, but since we basically just hold, we don’t really use it. But you’re right, it should be calculation 9.

13. As the supply and demand for foreclosures tightens, many investors are using the 80% rule!

• Unfortunately, that does seem to be the way things are going. Since we’re looking to “BRRR out” or get a private loan up front and refinance out on the back end, I guess we go with the 75% rule.

14. This has been very helpful.

15. Very helpful article! And thanks for explaining the target range and result meanings.

16. Great article, very helpful!

17. What is annual debt service on the Debt Service Ratio calculation? Where is this number coming from?

• Debt service is just your total loan payments. So annual debt service is your monthly debt payment X 12.

18. Great article! Cery concise and convincing.
I always had trouble understanding cap rate but this article definitely helped me out 🙂

20. How are you defining NOI in this context?

• I’m just defining NOI as follows:

Gross Operating Income (all income, rent, laundry, etc.)

Gross Expenses (All property related expenses, i.e. maintenance, management fee, etc. with exception of debt service which is not included)
=
Net Operating Income

21. In the Cash on Cash calculation you ended with “This is a critical calculation not only when it comes to valuing a property, but also when it comes to evaluating what kind of debt or equity structure to use when purchasing it.”

Can you offer more explanation or direction in terms of what you meant by debt or equity structure? Maybe provide an example? Thanks!

• It helps you calculate your return on the cash you are actually using for the investment. This is usually the downpayment. When you buy a \$100,000 investment home with financing and 20% down (\$20k), you aren’t actually putting in \$100k. You’re investing the \$20k and getting a return on that.

I think what he means by debt/equity structure is given the return rate, do you want to buy the investment home all cash or downpayment.

• The idea is you can compare what your cash on cash return will be with and without debt. With debt, your cash flow will be less, but also your cash investment will be less. So for example, let’s say that you have the following options:

No Debt:
Cash Investment: \$100,000
Cash Flow: \$15,000
Cash on Cash: \$15,000 / \$100,000 = 15%

Debt:
Cash Investment: \$25,000
Cash Flow: \$5000
Cash on Cash: \$5000 / \$25,000 = 20%

20% > 15%, so your cash on cash will be better with debt (you will earn more on every dollar you put into the property). Of course, that’s not the only consideration. There’s more risk with debt and often buying the property without debt is impossible, so there’s more to look into. But cash on cash is critical for evaluating debt versus no debt alternatives.

22. I use only cash on cash return. As a BRRRR guy that does all my own work and manage my biz my overhead is very small. All my expenses are summed up on a simple spread sheet as well as positive cash flow and hand it to my wealth building CPA. The CPA waves the magic sharp pencil and keeps profit high and taxes low. So the math is money in – money out – tax burden = profit. Very simple and highly profitable.

23. This was awesome – Now I don’t have to read or buy – What Every Real Estate Investor Needs To Know About Cashflow!!

24. Andrew this is exactly what I needed right now.

Thanks!

25. Andrew,

A couple questions about depreciation for analyzing buy/hold properties:

26. Oops, let’s try again please:

1. Should I calculate depreciation (benefit) into my cash flow calculations?
2. Is depreciation figured on the building and the land, or just the building?
3. Is depreciation figured on my basis or on ARV?

The reason I ask, is I am developing my spreadsheet, and need to know if i should ignore depreciation for computation purposes.

Thank you.

• 1. You should not count depreciation in your cash flow analysis (other than how much it deducts from your income taxes). Really, depreciation is only for taxes as real estate generally appreciates if it is maintained properly.
2. Depreciation only counts against the building, not the land.
3. Depreciation is figured on your basis in the property, not the ARV.

27. Great article.

28. Awesome and valuable article!!

29. Only wanna comment that you have a very decent website, I enjoy the style and design it really stands out.

30. Great article and info.

31. I love computing ratios! Thank you – now these percentages make more sense to me now especially when it comes to financing and business offer side.

32. Awesome article, thanks for breaking all of these down. As a newer investor all the equations are a little intimidating and this makes them very easy to understand.

• Absolutely Tiffany. Thank you. And while they can be intimidating, the calculations really aren’t that hard once you get the hang of them.

33. Super helpful to have these all in one spot and great that you put their interpretation in context. Thanks for the (re)post!

What is a good metric for evaluating a straight land purchase? (i.e. when there’s no income).

I ask because I’ve considered rental properties where the cashflow isn’t great but it’s sitting on a good size lot. I was familiar with Cap rate and CoC but wasn’t clear on how to evaluate such an investment, I just don’t know how to model it. I figure if I understood how to evaluate a pure land purchase then I could weight a house purchase with land as say “50% rental, 50% land”. The Cap rate will be poor as an income property but the investment would be for appreciation of the land with some cash flow to offset the additional financing cost. This say versus a townhouse with a good Cap rate but less land and less appreciation, which is what I’ve bought so far. Thanks in advance!