How to Analyze a Real Estate Deal: Numbers Every Investor Should Know

In real estate investing, emotions can cost you—but the numbers will always tell the truth. Whether you're buying your first rental property or your fifteenth, the ability to properly analyze a deal is what separates successful investors from speculators.

Buying based on “gut feeling” or looks alone can lead to poor cash flow, unexpected losses, or long-term regret. That’s why smart investors rely on key metrics to assess a property’s financial performance before making an offer. In this blog, we’ll break down the most important numbers you need to know and how to use them to evaluate your next investment.

1. Net Operating Income (NOI)

NOI = Gross Rental Income – Operating Expenses

Net Operating Income represents how much money the property generates after expenses—excluding mortgage payments. It includes rent collected and subtracts out costs like property taxes, insurance, repairs, management fees, and utilities (if paid by the owner).

A strong NOI is the foundation of a profitable investment. It also plays a major role in determining property value, especially for multi-unit buildings.

2. Cap Rate (Capitalization Rate)

Cap Rate = NOI ÷ Purchase Price

Cap rate measures a property's rate of return if you bought it with 100% cash. It’s a quick way to compare properties in the same market.

For example, a property with a $20,000 NOI and a $400,000 purchase price has a 5% cap rate. Higher cap rates typically signal higher potential returns—but may also reflect higher risk or less desirable areas.

Look at cap rates as part of a bigger picture. They don’t account for financing or tax benefits, but they’re great for comparing deals.

3. Cash-on-Cash Return

Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested

This metric tells you how hard your actual dollars are working. It factors in your mortgage payments and calculates return based on the money you've put into the deal—typically down payment, closing costs, and renovations.

If you invest $100,000 and earn $8,000 per year in cash flow, your cash-on-cash return is 8%. This number is especially useful for leveraged deals, where you're not buying the property outright.

4. Debt Service Coverage Ratio (DSCR)

DSCR = NOI ÷ Annual Mortgage Payments

Lenders love this number. It tells them whether the property can support the debt you're taking on. A DSCR of 1.2 means the property generates 20% more income than needed to cover the mortgage.

Most lenders require a DSCR of at least 1.1 to 1.25 for investment properties. A low DSCR may signal that you're over-leveraged or that the deal is too tight.

5. Break-Even Ratio

Break-Even Ratio = (Operating Expenses + Debt Service) ÷ Gross Income

This ratio shows how much of your income is consumed by costs. A ratio above 90% means there's very little wiggle room for unexpected expenses, vacancies, or rate increases.

Ideally, you want this ratio to be well below 85%, giving you breathing room and protecting your cash flow.

Final Thoughts

Analyzing a real estate deal isn’t complicated—but it requires discipline. Don’t rely on surface-level impressions or assumptions. Run the numbers, stress-test your scenarios, and use conservative estimates.

At Greenell Capital, we encourage all investors—new and seasoned—to master these core calculations. Because when the math makes sense, everything else falls into place.