Master the key metrics every real estate investor needs to evaluate a property.
Analyzing investment properties isn't magic—it's math. Learn these five key metrics and you'll be able to evaluate almost any real estate deal quickly and accurately.
CAP RATE (CAPITALIZATION RATE)
Cap Rate = Net Operating Income / Property Value
This tells you the annual return on your investment, assuming you paid cash. A 5% cap rate means you'd make 5% annually. Houston investment properties typically have 5-7% cap rates depending on location and condition.
CASH-ON-CASH RETURN
This measures how much cash you get back each year relative to the cash you invested. If you put $50K down and make $6K in annual cash flow, your cash-on-cash return is 12%. Most investors target 8-12% cash-on-cash returns.
DSCR (DEBT SERVICE COVERAGE RATIO)
DSCR = Net Operating Income / Annual Debt Service
Lenders care about this number. It shows whether rental income covers your mortgage payments. Most lenders want to see a DSCR of at least 1.25. A DSCR of 1.5 is excellent.
PRICE-TO-RENT RATIO
Price-to-Rent = Property Price / Annual Rental Income
Lower ratios (16-18) indicate better rental income relative to price. Higher ratios (22+) suggest lower rental yields. Houston typically sees 18-21 P/R ratios in rental-friendly neighborhoods.
THE 70% RULE
Maximum Offer = (ARV × 0.7) - Repairs
This helps you find good deals quickly. If a property's After Repair Value is $300K and repairs cost $30K, you shouldn't pay more than $180K. This leaves room for profit and contingencies.