Cap Rate
NOI ÷ Property Value
Higher is not automatically safer... compare with the market.Real estate for beginners
Deal Analyzer
A step-by-step framework for gathering the numbers, judging the returns, and deciding whether a deal is viable.
Real estate can be profitable if you learn to separate a viable deal from an expensive problem.
Use this beginner framework to walk through the key parts of a property analysis before committing money.
Gather property details
- Address and property type
- Number of units or square footage
- Current rent roll and occupancy
- Recent operating statements
- Proposed purchase price and terms
Estimate income
- Project gross rental income using market rates
- Account for vacancy to calculate effective gross income
- Identify other income streams
Estimate expenses
- Property tax, insurance, maintenance, and repairs
- Management, utilities, and HOA fees
- Reserve funds for future capital expenditures
Calculate net operating income
- Gross potential income
- Less total operating expenses
- Equals net operating income
Determine necessary investments
- Down payment, normally 20–25% for investment property
- Closing costs, commonly 2–5%
- Rehabilitation budget and contractor estimates
- Inspections, surveys, permits, appraisal, furniture, and financing costs
- Six to twelve months of reserves
Evaluate returns
- Cap rate: NOI divided by property value
- Cash-on-cash return: annual cash flow divided by cash invested
- DSCR: NOI divided by annual debt service
- IRR: total return over time including appreciation, income, expenses, and time value
Conduct sensitivity analysis
- Test best, worst, and likely cases
- Change rents, expenses, vacancies, and cap rate
- Measure the effect on returns
Compare alternatives
- Compare returns with similar properties
- Compare required effort and risk
- Measure against other investments
Cash-on-Cash
Net Cash Flow ÷ Cash Invested
Measures the annual return on actual cash invested.DSCR
NOI ÷ Annual Debt Service
Lenders often seek 1.25 or greater.