The Complete Guide to Real Estate Investment Analysis

Which Metric Should You Use?

Every metric in real estate investment analysis answers a specific question. The challenge for investors — especially those evaluating their first few properties — is knowing which metric to use when. This decision framework maps your situation to the right metric.

By Investment Stage

Initial screening (30 seconds per property): Use Gross Rent Multiplier (GRM) and rent-to-price ratio to quickly filter listings. These require only listing price and estimated rent — no expense analysis needed. Properties that fail both metrics by a wide margin are not worth deeper analysis. GRM below 10 and rent-to-price above 0.8% are common starting thresholds for residential properties.

Property evaluation (15-30 minutes per property): Calculate cap rate to assess property-level yield. This requires estimating Net Operating Income (NOI), which means accounting for vacancy, property taxes, insurance, maintenance, and property management. Cap rate strips out financing and lets you compare properties objectively. A property with a cap rate below your market average needs a compelling reason to proceed.

Financing analysis (before making an offer): Run DSCR to confirm the property supports debt service at current interest rates. Check the mortgage payment for different down payment scenarios. If DSCR falls below 1.0, the property cannot service the proposed debt without personal income subsidizing the shortfall. Do this before spending money on inspections.

Final decision (before signing the contract): Calculate monthly cash flow and cash-on-cash return using actual rent comps, verified expenses, and your loan commitment terms. These metrics tell you what you personally will earn. Run a long-term projection to understand total return including appreciation, rent growth, and mortgage paydown over your hold period.

By Investor Profile

First-time investors: Focus on cash flow first. Positive monthly cash flow means the property pays for itself — reducing the financial risk of your first investment. Set a minimum cash flow threshold ($100-200 per unit per month is common) and do not compromise. Cash-on-cash return is your secondary metric — it tells you whether the return justifies tying up your capital.

Cash buyers (1031 exchanges, IRAs): Cap rate is your primary metric because it equals your return when there is no financing. Compare cap rates across properties in your target market. DSCR is irrelevant if you are not using debt, but you should still calculate it — understanding how a property would perform with leverage affects resale value to the next buyer.

Scaling investors (5+ properties): DSCR becomes critical because lenders evaluate your portfolio's aggregate debt service coverage. A strong DSCR on a new acquisition can offset tighter ratios on existing properties. Cash-on-cash return helps you allocate capital efficiently — when choosing between two viable deals, deploy your limited equity where the leveraged return is highest.

BRRRR investors (buy-rehab-rent-refinance-repeat): Cash-on-cash return matters most because the strategy aims to recover invested capital through refinancing. After rehab, the property must appraise high enough to refinance out your investment. Post-refinance cash flow and DSCR determine whether the deal actually works long-term.

By Property Type

Single-family rentals: Cash flow and DSCR are paramount because 100% vacancy risk (one tenant leaving means zero income) requires strong debt coverage. Cap rate is useful for comparison but less meaningful in isolation for single units.

Small multifamily (2-4 units): All metrics apply equally. The diversification across units makes both cap rate and DSCR more reliable predictors. Many investors find the 2-4 unit range optimal because conventional financing remains available while income diversification reduces risk.

House hacking: Use the house hack calculator to model the unique scenario where you occupy one unit and rent the others. Your effective housing cost (mortgage minus rental income) is the key metric — even negative cash flow on the whole property can be a win if it reduces your housing expense below what you would pay in rent.

Commercial and large multifamily: Cap rate and DSCR dominate because commercial lenders underwrite primarily on property financials. Cash-on-cash return matters for your personal investment decision but has less influence on loan approval.

Income & Return Metrics

Income and return metrics evaluate what a property earns relative to its price or your invested capital. These are the metrics that answer "Is this property profitable?" and "Does this investment meet my return requirements?"

Cap Rate (Capitalization Rate)

Cap rate divides Net Operating Income by the purchase price, expressing the property's unlevered yield as a percentage. It measures what the property earns before financing — the return you would receive if you paid all cash. Cap rates are the universal language of real estate investment comparison: a 6.5% cap rate in Denver means the same thing as a 6.5% cap rate in Memphis, even though the absolute prices and rents differ dramatically.

U.S. residential investment properties typically trade at 4-8% cap rates (source: National Association of Realtors). Market-level cap rate data from CBRE and Marcus & Millichap provides benchmarks for comparison.

Cash-on-Cash Return

Cash-on-cash return divides your annual pre-tax cash flow by the total cash you invested (down payment, closing costs, rehab). Unlike cap rate, this metric includes financing — it tells you what your equity actually earns. The same property can produce a 7% cap rate but a 10% cash-on-cash return with favorable leverage, or a 3% cash-on-cash return with expensive debt.

Most investors target 8-12% cash-on-cash returns for single-family and small multifamily properties, though this varies by market and risk tolerance.

Rental Property Cash Flow

Cash flow is the absolute dollar amount remaining after all expenses and debt service. It is the most tangible metric — the money that hits your bank account each month. A property with strong percentage returns but only $50/month in cash flow may not justify the management effort. Cash flow analysis requires the most detailed expense modeling: vacancy, property management, maintenance, insurance, taxes, and capital expenditure reserves.

Investment Projection

Short-term metrics (cap rate, annual cash flow) miss the long-term picture. A property with modest year-one cash flow can deliver excellent total returns through appreciation, rent growth, and mortgage paydown over a 5-10 year hold. Investment projections model these compounding effects, helping you evaluate whether a property meets your wealth-building goals — not just your monthly income needs.

Debt & Financing Metrics

Most real estate investors use leverage — and the terms of that leverage can make or break a deal. Debt metrics evaluate whether a property supports financing and how different loan structures affect your returns.

DSCR (Debt Service Coverage Ratio)

DSCR is the gatekeeper metric for investment property financing. It divides NOI by annual debt service to measure how much income cushion exists above the mortgage payment. A DSCR of 1.25 means the property generates 25% more income than the mortgage requires — the standard threshold for Fannie Mae investment property loans (source: Fannie Mae Selling Guide B2-2-03).

DSCR-specific loan programs have expanded significantly for investors, with some accepting ratios as low as 1.0. These loans qualify based on property income rather than personal income — particularly useful for self-employed investors or those with complex tax returns.

Mortgage Payment

Understanding your monthly mortgage payment is the foundation of every leveraged return calculation. The payment amount depends on loan amount, interest rate, and term — and small changes in each variable produce meaningful differences in cash flow. Modeling different scenarios (20% vs 25% down, 30-year vs 15-year term, current rates vs rate buydown) helps you find the financing structure that optimizes your returns.

Mortgage Amortization

Amortization schedules show how each payment splits between principal and interest over the life of the loan. In the early years, most of each payment goes to interest. Understanding this split matters for two reasons: (1) the principal portion builds equity — a form of forced savings, and (2) the interest portion is typically tax-deductible for investment properties, affecting your after-tax return.

Reviewing the amortization schedule at different hold periods (5, 7, 10 years) reveals how much equity you build through mortgage paydown alone — a return component that cash flow metrics miss.

Quick Screening Metrics

Screening metrics trade accuracy for speed. They require minimal data — usually just the listing price and estimated rent — and eliminate obviously bad deals in seconds. No investor has time to perform a full financial analysis on every listing in a market. These ratios let you filter hundreds of properties down to a manageable shortlist for deeper analysis.

Gross Rent Multiplier (GRM)

GRM divides the purchase price by annual gross rent. A property listed at $200,000 generating $24,000/year in gross rent has a GRM of 8.3. Lower values indicate more income per dollar of price. GRM is intentionally simple — it ignores expenses entirely, which limits its usefulness for final decisions but makes it excellent for rapid screening.

Typical GRM targets range from 6 to 10 for residential investment properties. A GRM above 15 generally indicates the property is priced for appreciation rather than cash flow — which may or may not align with your strategy.

Rent-to-Price Ratio

The rent-to-price ratio expresses monthly rent as a percentage of the purchase price. The widely cited "1% rule" suggests that monthly rent should equal at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month to meet this threshold.

In practice, the 1% rule is a rough guideline — not a universal requirement. In high-cost markets (coastal metros, tech hubs), properties rarely meet the 1% threshold but can still produce acceptable returns with low vacancy and strong appreciation. In affordable markets (Midwest, Sun Belt), properties exceeding 1% are more common but may carry higher vacancy and management costs.

House Hack Analysis

House hacking — living in one unit of a multi-unit property while renting the others — is a unique strategy that blends personal housing with investment. The analysis differs from traditional rental analysis because your effective housing cost (mortgage minus rental income) is the primary metric, not pure investment return. House hacking can be the most efficient entry point into real estate investing, offering owner-occupied financing rates (lower than investor rates) and FHA or VA loan eligibility with lower down payments.

Analysis Tools & Templates

Individual calculators are useful for exploring specific metrics, but a complete property analysis requires combining multiple metrics in a single structured workflow. Our analysis templates integrate cap rate, DSCR, cash flow, cash-on-cash return, and investment projections into unified spreadsheets with built-in formulas — so you can evaluate a property holistically rather than switching between separate tools.

Templates are available in both Excel and Google Sheets formats. Input your property's numbers once, and every metric calculates automatically. Compare scenarios by changing the down payment, interest rate, or purchase price and watching all metrics update in real time.

In-Depth Articles

These methodology articles explore specific aspects of real estate investment analysis in depth. Each article provides worked examples, authoritative source citations, and links to the relevant calculators so you can apply the concepts to your own properties.