Understanding Financial Metrics
Learn what each number means and how to use them to find great deals.
When you analyze a property, you'll see several financial metrics. Don't let the jargon intimidate you—we'll break down each one in plain English.
Monthly Cash Flow
What it means: Money in your pocket each month after ALL expenses.
How It's Calculated:
Monthly Rent Collected
−
Mortgage Payment
−
Property Taxes
−
Insurance
−
Maintenance & Repairs
−
Property Management Fees
=
Monthly Cash Flow
Example:
Monthly Rent: $2,000
Mortgage: $1,000
Property Taxes: $200
Insurance: $150
Maintenance: $100
Management: $160
Monthly Profit: $390
What's Good?
- Positive (Green): $100+ per month is excellent for long-term rentals
- Break Even: Close to $0—you're not losing money, but not making much
- Negative (Red): You're paying money out of pocket each month
Remember: This is actual money that hits your bank account. Over 30 years, $390/month = $140,400!
Cap Rate (Capitalization Rate)
"How hard is this property working for me?"
What It Means (In Plain English):
Cap Rate is the percentage return you're getting on your actual cash investment. It answers: "For every dollar I put into this property, how much comes back to me annually?"
How It's Calculated:
Annual Net Operating Income
÷
Your Cash Invested (Down Payment + Closing Costs)
=
Cap Rate %
Example:
Property Price: $300,000
Your Down Payment: $60,000
Annual Profit: $4,800
$4,800 ÷ $60,000 = 8% Cap Rate
For every $1 you invested, you make 8 cents per year.
What's Good?
- 5-7%: Conservative, low-risk properties (common in expensive areas)
- 8-10%: Great! A solid rental property
- 10%+: Excellent! Either a deep discount deal or high-rent area
General Rule: Compare cap rates with what you could earn elsewhere (stocks = 10%, bonds = 4%, savings = 0.5%). If your cap rate is higher, it might be a good real estate deal.
Cash-on-Cash Return
"What percentage of MY money am I getting back per year?"
What It Means:
Cash-on-Cash Return is the annual cash profit divided by the actual cash you put in. It's different from Cap Rate because it includes your financed portion (the mortgage).
How It's Calculated:
Annual Cash Profit
÷
Total Cash You Invested
=
Cash-on-Cash Return %
Example:
Total Cash Invested: $60,000 (down payment) + $12,000 (closing) = $72,000
Annual Cash Profit: $4,680
$4,680 ÷ $72,000 = 6.5% Cash-on-Cash Return
You're getting 6.5% annual return on YOUR money (not counting equity buildup).
What's Good?
- 5%: Minimal return (could do better with stocks)
- 8-15%: Solid return for rentals
- 20%+: Excellent! (Might mean you found a great deal)
Why It Matters: This is YOUR actual return. If you could get 10% in the stock market, why settle for 5% in real estate (unless you expect the property to appreciate significantly)?
DSCR (Debt Service Coverage Ratio)
"Can this property afford its mortgage?"
What It Means:
DSCR measures whether the property generates enough income to cover the mortgage payment and other debt. Lenders use this to decide if they'll finance your deal.
How It's Calculated:
Annual Net Operating Income
÷
Annual Mortgage Payment
=
DSCR Ratio
Example:
Annual Income (after all expenses): $4,800
Annual Mortgage Payments: $12,000
$4,800 ÷ $12,000 = 0.40 DSCR
The property only covers 40% of its mortgage payment. NOT LENDER-FRIENDLY.
What's Good?
- Below 1.0: Problem Property doesn't cover its own mortgage
- 1.0 - 1.2: Risky Breaks even; most lenders won't approve
- 1.2 - 1.5: Good Most lenders will approve
- 1.5+: Excellent Strong income, very lender-friendly
Why It Matters: If you can't get financing, you can't buy the property. Plus, a DSCR above 1.25 means you have a safety cushion if rent drops or expenses rise.
ROI (Return on Investment)
"How much profit will I make when I sell?"
What It Means:
For rental strategies, ROI measures total return (rental income + appreciation). For Fix & Flip, it's the profit percentage when you sell.
How It Works (Fix & Flip Example):
Selling Price
−
Total Cash Invested (Purchase + Repairs + Costs)
=
Profit
÷
Total Cash Invested
=
ROI %
Example (Fix & Flip):
Purchase Price: $200,000
Down Payment: $50,000
Renovation Costs: $30,000
Selling Costs: $24,000 (6% of sales price when selling at $400,000)
Selling Price: $400,000
Profit: $400,000 − $50,000 − $30,000 − $24,000 = $296,000
ROI: $296,000 ÷ $50,000 = 592% ROI!
You turned $50k into $346k!
What's Good?
- Fix & Flip: 20%+ ROI is solid; 50%+ is excellent
- Rentals (per year): 10%+ is great; 15%+ is exceptional
Pro Tip: Don't just look at ROI for one year. For rentals, combine yearly cash flow ROI with long-term appreciation. For flips, focus on absolute profit $ and how long the project takes.
Quick Metric Cheat Sheet
| Metric | What It Answers | Good Number | Best For |
|---|---|---|---|
| Monthly Cash Flow | Money in my pocket monthly? | $100-500+ | Rentals (LTR, MTR, STR) |
| Cap Rate | How hard is the property working? | 8-12% | Comparing rental properties |
| Cash-on-Cash Return | Return on MY cash per year? | 8-15% | Comparing different investments |
| DSCR | Can the property afford the mortgage? | 1.25+ | Getting a loan approved |
| ROI | Profit when sold? | 20%+ (flip), 10%+ (annual) | Fix & flip projects |
You Now Know the Numbers!
You don't need to be a math genius to use them. The analyzer calculates everything for you. Now let's see these in action with real examples →