You can love real estate. You can be excited about deals. You can even have a nose for what a “good” property looks like. But if you don’t understand the numbers behind the deal, you’re gambling—not investing.
Numbers are how you keep emotion in check. They help you cut through the noise, spot bad deals fast, and double down on the ones that deserve your time and capital.
When you’re serious about building a portfolio—whether you’re just getting started or adding your tenth property—you’ve got to move past the surface. Because the truth is, “gut feeling” isn’t a strategy. It might help spark a conversation, but the numbers are what turn a maybe into a move.
These aren’t complicated formulas you need a finance degree to understand. They’re everyday tools that successful investors use to buy smart, hold strategically, and scale with confidence. They’re how you stop second-guessing and start building with intention.
Pro Tip: You don’t need to memorize all of these. But you do need to know where to find them and what they’re telling you. Use them as a checklist when evaluating any property—and you’ll be ahead of most investors right out of the gate.
Let’s break them down—real examples, plain language, and no fluff.
1. Capitalization Rate (Cap Rate)
Cap rate is a simple way to estimate the return on a property if you bought it outright, with no mortgage involved. It’s the ratio of a property’s Net Operating Income (NOI) to its purchase price. This gives you a percentage that reflects how much income you’re earning relative to what you paid.
Cap rate is often used to compare similar properties in the same area. Think of it like a snapshot that tells you, “If I paid cash for this building, what kind of return would I get from rent alone—before financing or taxes?”
Cap rate helps investors quickly evaluate how attractive a property’s income is compared to its price. If you’re deciding between two similar buildings, the one with the higher cap rate is generally considered to be generating more income per dollar spent. It also gives insight into perceived risk. Lower cap rates usually signal higher property prices or lower returns—often seen in stable markets. Higher cap rates may suggest higher risk or the need for more active management.
Example:
- Purchase Price: $1,000,000
- Net Operating Income (NOI): $60,000/year
- Cap Rate = $60,000 ÷ $1,000,000 = 6%
How to use it: Use cap rate when you want a fast comparison across properties. But remember—it doesn’t account for financing, tax impacts, or appreciation potential. It’s just one piece of the puzzle, best used as an initial filter before deeper analysis.
2. Cash-on-Cash Return (CoC)
What it is: Cash-on-cash return measures the annual return you’re earning on the actual cash you’ve put into the deal. It focuses solely on the money you’ve physically invested—typically the down payment, closing costs, and renovation expenses—and compares that to the annual cash flow you’re pulling from the property after all expenses and financing.
This is the number that tells you what your money is actually doing for you, especially in leveraged deals where you’re using financing. It strips away the property’s total price and focuses just on your out-of-pocket contribution.
Why it matters: This is your real return, based on what you put into the deal—not some theoretical number.
Example:
- Total Cash Invested: $80,000 (down payment, closing, renos)
- Annual Net Cash Flow: $8,000
- CoC Return = $8,000 ÷ $80,000 = 10%
How to use it: Use this to compare different deals, or to benchmark against other investment options like stocks or lending.
3. Debt Coverage Ratio (DCR or DSCR)
What it is: The debt coverage ratio tells you how comfortably your property’s income can cover its mortgage payments. It’s calculated by dividing the Net Operating Income (NOI) by the annual debt service (principal and interest).
In plain terms, it’s a stress test for your cash flow. A ratio of 1.0 means you’re just breaking even on your debt payments. Anything above that means you’ve got breathing room. Anything below? You’re losing money before you’ve paid for anything else.
Why it matters: A DCR below 1.0 means you’re losing money before you even cut the mortgage cheque.
Example:
- NOI: $50,000
- Annual Debt Payments: $40,000
- DCR = $50,000 ÷ $40,000 = 1.25
How to use it: Make sure you always have a buffer. If your DCR is barely over 1.0, one unexpected repair or vacancy could put you underwater.
4. Operating Expense Ratio (OER)
What it is: OER tells you how much of your income is going to cover the day-to-day expenses of running your property. It includes things like property taxes, insurance, maintenance, utilities (if you cover them), and property management—but not your mortgage.
The lower your OER, the more efficient your property is in turning income into profit. A high OER can indicate that you’re spending too much on operations, or that rents are too low for the costs involved.
Why it matters: High expenses can crush your profits. This ratio helps you keep your eye on efficiency.
Example:
- Gross Income: $100,000
- Operating Expenses: $40,000
- OER = $40,000 ÷ $100,000 = 40%
How to use it: Use this to assess property performance over time. A rising OER could mean your maintenance or management costs are getting out of control.
5. Loan-to-Value Ratio (LTV)
What it is: Loan-to-Value (LTV) shows you how much debt you’re using to buy a property relative to its current value. It’s a key metric that banks and lenders rely on to assess risk, and it helps you understand how leveraged you are.
The formula is simple: divide the loan amount by the appraised property value. A higher LTV means you’re using more borrowed money and have less equity in the property.
Why it matters: Lenders care, and so should you. Too high and you risk being over-leveraged.
Example:
- Property Value: $500,000
- Loan Amount: $400,000
- LTV = $400,000 ÷ $500,000 = 80%
How to use it: Track it over time. As your property appreciates and you pay down the mortgage, your LTV drops—giving you equity you can tap into.
6. Gross Rent Multiplier (GRM)
What it is: GRM is a fast, back-of-the-napkin calculation that tells you how a property’s price compares to its rental income. It doesn’t factor in expenses—just the raw gross rent and purchase price. That makes it more of a starting point than a final verdict.
It’s best used when you’re quickly screening a bunch of listings and want to get a sense of which ones are worth a deeper look.
Why it matters: It’s a quick filter, especially when scanning a bunch of listings.
Example:
- Property Price: $600,000
- Gross Annual Rent: $60,000
- GRM = $600,000 ÷ $60,000 = 10
How to use it: Use GRM to narrow your search. Then dig into other numbers before pulling the trigger.
7. Return on Equity (ROE)
What it is: ROE measures how well your current equity in a property is performing. Over time, as you pay down your mortgage and the property appreciates, your equity grows—but that doesn’t mean your return does. In fact, your return can actually shrink if you’re not reinvesting or repositioning.
ROE helps you determine whether it’s time to refinance, sell, or redeploy capital into higher-performing assets.
Why it matters: You might be sitting on “lazy equity” that could be working harder elsewhere.
Example:
- Annual Cash Flow: $10,000
- Current Equity: $400,000
- ROE = $10,000 ÷ $400,000 = 2.5%
How to use it: Use this to decide when to refinance or sell. A low ROE might be a sign it’s time to reallocate capital.
How to Actually Use This Stuff
- Looking at a new deal? Start with cap rate and GRM to see if it’s even in the ballpark.
- Digging deeper? Use CoC, DCR, and OER to test viability and risk.
- Getting a mortgage? You’ll need to show LTV and DCR.
- Reviewing your portfolio? ROE and OER tell you what’s dragging—or ready to grow.
No single ratio gives you the full story. But together, they give you a clear, 360-degree view of what you’re working with.
Final Word
If you’re serious about real estate investing, you’ve got to get fluent in the numbers. Not to impress lenders. Not to sound smart at networking events. But because these numbers help you protect your time, your money, and your long-term goals.
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