Learn the numbers
Short guides to the metrics and rules of thumb real estate investors use, each with the formula, a worked example, the common mistakes and a calculator to try it with your own numbers.
What is a cap rate? How to calculate it and what it tells you
The capitalization rate is a property's yearly net operating income divided by its price: the return you'd earn if you paid all cash. It's the quickest way to compare properties side by side.
Read the guideNet operating income (NOI): what counts and how to calculate it
NOI is the money a rental property earns in a year after paying its operating costs, but before the mortgage. Cap rate, DSCR and cash flow are all built on it.
Read the guideCash-on-cash return: the return on the money you actually put in
Cash-on-cash return is a year's cash flow divided by the cash you invested. Unlike cap rate, it includes your mortgage, so it shows what your own money earns.
Read the guideDebt service coverage ratio (DSCR) for rental properties
DSCR compares a property's income with its loan payments. At 1.0 the rent just covers the debt; lenders usually want a cushion above that.
Read the guideGross rent multiplier (GRM): a quick way to compare rental prices
GRM is a property's price divided by its gross rent: how many years of rent it would take to pay the price. It's quick because it ignores expenses, which is also its weakness.
Read the guideThe 1% rule in real estate, and why it's only a rough screen
The 1% rule says a rental's monthly rent should be at least 1% of its purchase price. It's a fast way to sort listings, but two properties can pass it and have very different cash flow.
Read the guideThe BRRRR method: buy, rehab, rent, refinance, repeat
BRRRR is a way to recycle the same cash into several rentals: buy a property below value, fix it up, rent it, then refinance at the new value to pull most of your money back out.
Read the guideThe 70% rule for house flipping and wholesaling
The 70% rule caps what a flipper should pay: 70% of the after-repair value, minus the cost of repairs. Wholesalers use the same number and subtract their fee.
Read the guideHow rent estimates work: HUD Fair Market Rents vs. Census medians
Free rent estimates usually come from two public sources: HUD's Fair Market Rents and the Census Bureau's American Community Survey. They measure different things, and knowing the difference helps you use them well.
Read the guideCap rates for commercial property: how income sets the price
Commercial buildings are priced on their income. Divide NOI by the market cap rate and you have a first estimate of value.
Read the guideHow commercial lenders size a loan: DSCR, LTV and debt yield
Commercial lenders run three tests and lend the smallest amount any of them allows. Knowing which test limits you tells you how to borrow more.
Read the guideBalloon loans: how commercial loans come due before they're paid off
Commercial loans usually figure the payment over 25 or 30 years but come due after 5, 7 or 10. Whatever you still owe then is the balloon.
Read the guideBridge loans: how they work, what they cost and how you get out
A bridge loan is short, expensive money to buy and improve a property. The deal works only if the improved property can refinance into a long-term loan big enough to pay the bridge off.
Read the guideCreative real estate financing for beginners
Four ways to buy a home without a regular bank loan, or with the seller's help. Who holds the deed, who holds the loan, what each side risks, and when each one fits.
Read the guideTriple net (NNN), double net, single net and gross leases explained
Commercial rents are quoted different ways. The lowest quoted rent isn't always the cheapest once taxes, insurance and maintenance are added.
Read the guideHow to track rental property income and expenses (free spreadsheet template)
Record every payment in and out once a month, by property and category. From that one list you can see cash flow, NOI and which properties are losing money.
Read the guide