Ask ten real estate investors how they evaluate a deal and you will get ten different answers. Some swear by cap rates. Others focus exclusively on cash-on-cash return. A few will tell you that IRR is the only metric that matters.

The truth is that no single metric tells the whole story. Each one illuminates a different aspect of a deal’s performance — profitability, risk, leverage efficiency, or long-term wealth creation. Understanding all seven gives you a complete picture and helps you avoid the blind spots that come from relying on just one number.

1. Net Operating Income (NOI)

NOI is the foundation that several other metrics are built on. It measures the income a property generates after all operating expenses but before debt service and taxes.

Formula:

NOI = Gross Rental Income - Vacancy Loss - Operating Expenses

Operating expenses include property taxes, insurance, property management fees, maintenance, utilities (if landlord-paid), and reserves for capital expenditures. They do not include mortgage payments or income taxes.

Example

  • Gross rental income: $36,000/year
  • Vacancy (5%): -$1,800
  • Operating expenses: -$12,200
  • NOI = $22,000

What Is a Good NOI?

NOI is not a ratio, so there is no universal “good” number. It depends on the property’s price, market, and your financing. What matters is that NOI is positive and sufficient to service your debt with room to spare.

Common Pitfall

Sellers and listing agents often present a “pro forma” NOI that assumes zero vacancy, below-market management fees, or unrealistically low maintenance reserves. Always recalculate NOI using your own assumptions.

2. Capitalization Rate (Cap Rate)

The cap rate measures a property’s unlevered yield — what return you would earn if you purchased the property with all cash.

Formula:

Cap Rate = NOI / Purchase Price

Example

  • NOI: $22,000
  • Purchase price: $275,000
  • Cap Rate = 8.0%

What Is a Good Cap Rate?

It varies dramatically by market and property type. Class A apartments in major metros might trade at 4-5% cap rates. Single-family rentals in smaller Midwest markets might be at 8-10%. Higher cap rates generally indicate higher risk or less desirable locations.

General benchmarks:

  • 4-6%: Low risk, high-demand markets
  • 6-8%: Moderate risk, solid cash flow markets
  • 8-10%+: Higher risk, often value-add or secondary markets

Common Pitfall

Cap rate ignores financing entirely. A property with a great cap rate can still produce negative cash flow if you overleverage it. Never use cap rate as your sole decision metric.

3. Cash-on-Cash Return (CoC)

Cash-on-cash return measures the annual cash flow you receive relative to the actual cash you invested. Unlike cap rate, it accounts for your financing structure.

Formula:

Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested

Total cash invested includes your down payment, closing costs, and any rehab expenses paid out of pocket.

Example

  • Annual pre-tax cash flow: $5,400
  • Down payment: $55,000
  • Closing costs: $4,500
  • Total cash invested: $59,500
  • CoC Return = 9.1%

What Is a Good Cash-on-Cash Return?

Most investors target 8-12% as a minimum. Some markets and strategies (like BRRRR) can produce CoC returns well above 15%. Anything below 6% often means you could find better returns elsewhere.

Common Pitfall

CoC only reflects Year 1 (or the current year). It does not account for appreciation, mortgage paydown, or how cash flow changes over time. It is a snapshot, not a movie.

4. Gross Rent Multiplier (GRM)

GRM is a quick-and-dirty screening metric that tells you how many years of gross rent it would take to pay off the purchase price.

Formula:

GRM = Purchase Price / Annual Gross Rent

Example

  • Purchase price: $275,000
  • Annual gross rent: $36,000
  • GRM = 7.6

What Is a Good GRM?

  • Under 8: Generally attractive for cash flow investors
  • 8-12: Average, depending on market
  • Over 12: Typically appreciation-focused markets with thinner cash flow

Common Pitfall

GRM ignores expenses entirely. Two properties with identical GRMs can have wildly different profitability if one has double the expenses. Use GRM for quick screening, then dig deeper with NOI-based metrics.

5. Debt Service Coverage Ratio (DSCR)

DSCR measures whether a property generates enough income to cover its mortgage payments. Lenders use this metric to assess loan risk, and many DSCR loan programs require a minimum ratio.

Formula:

DSCR = NOI / Annual Debt Service

Annual debt service is your total mortgage payment (principal + interest) for the year.

Example

  • NOI: $22,000
  • Annual mortgage payments: $17,600
  • DSCR = 1.25

What Is a Good DSCR?

  • Under 1.0: The property does not generate enough to cover the mortgage. Red flag.
  • 1.0-1.2: Tight — any vacancy or unexpected expense puts you in the red.
  • 1.2-1.5: Healthy range for most investors.
  • Above 1.5: Strong coverage with a comfortable margin of safety.

Most DSCR lenders require a minimum of 1.2, and some demand 1.25.

Common Pitfall

DSCR only considers the property’s ability to service debt. It does not tell you whether the cash flow left after debt service is actually a good return on your invested capital. Pair it with cash-on-cash return for a fuller picture.

6. Internal Rate of Return (IRR)

IRR is the most comprehensive metric on this list. It accounts for the time value of money, incorporating every cash flow over the entire hold period — including the eventual sale.

In plain English: IRR is the annualized return rate that makes the net present value of all cash flows (inflows and outflows) equal to zero.

Why IRR Matters

Unlike cap rate or CoC return, IRR captures:

  • Cash flow growth over time (via rent increases)
  • Mortgage principal paydown (equity building)
  • Appreciation at sale
  • The timing of each cash flow (a dollar today is worth more than a dollar in five years)

Example (Simplified)

  • Total cash invested at purchase: $59,500
  • Year 1-5 annual cash flow: $5,400 to $6,800 (growing)
  • Sale proceeds at Year 5 (after paying off mortgage): $95,000
  • IRR: approximately 18.5%

What Is a Good IRR?

  • Under 10%: Below average for most real estate investments
  • 10-15%: Solid, especially for lower-risk properties
  • 15-20%+: Strong, often involving value-add or forced appreciation

Common Pitfall

IRR is highly sensitive to assumptions — especially the exit cap rate and appreciation rate. Overestimate appreciation by even 1-2% annually and the IRR projection looks dramatically better. Always stress-test your assumptions.

7. Equity Multiple

The equity multiple tells you how many times over you will get your invested capital back, including all cash flow and the sale proceeds.

Formula:

Equity Multiple = Total Distributions / Total Invested Capital

Example

  • Total cash invested: $59,500
  • Total cash flow received over 5 years: $30,500
  • Net sale proceeds: $95,000
  • Total distributions: $125,500
  • Equity Multiple = 2.11x

An equity multiple of 2.11x means you got back $2.11 for every $1.00 invested.

What Is a Good Equity Multiple?

  • Under 1.5x: Below average over a 5-year hold
  • 1.5x-2.0x: Solid
  • 2.0x+: Strong

Common Pitfall

Equity multiple ignores timing. Getting 2.0x in 3 years is far better than 2.0x in 10 years, but the equity multiple treats them the same. That is why you should evaluate it alongside IRR.

How These Metrics Work Together

No single metric is sufficient. Here is a practical framework for using them together:

  1. Screen quickly with GRM to filter out obviously overpriced properties.
  2. Calculate NOI using realistic expense assumptions.
  3. Check the cap rate to understand unlevered yield and compare across markets.
  4. Model your financing and calculate DSCR to confirm the property can service its debt.
  5. Calculate cash-on-cash return to see what your actual invested capital earns in Year 1.
  6. Run a full hold-period analysis to project IRR and equity multiple over your planned timeline.

Tools like xREI automate this entire workflow. Input a property’s address and financial details, and the platform calculates all seven metrics simultaneously — powered by xREI’s underwriting and scoring engine — letting you compare deals side by side without rebuilding spreadsheets for every listing you evaluate.

Key Takeaways

  • NOI is the foundation — most other metrics are derived from it. Get this number right and everything else follows.
  • Cap rate measures unlevered yield — useful for comparing properties but blind to financing.
  • Cash-on-cash return reflects your actual capital efficiency — the metric most directly tied to your bank account.
  • GRM is a screening tool, not a decision tool — it ignores expenses entirely.
  • DSCR tells you if the deal survives — lenders care about this number and so should you.
  • IRR is the most complete metric — but also the most sensitive to assumptions.
  • Equity multiple shows total wealth creation — but ignores timing.

Bottom Line

Evaluating real estate deals with a single metric is like diagnosing a patient with a single test. You might get lucky, but you are more likely to miss something important. Track all seven of these metrics, understand what each one reveals (and what it hides), and you will make sharper investment decisions.

xREI’s free tier includes automated calculations for all seven metrics covered in this guide. Upload a deal and get a complete analysis in minutes instead of hours — so you can spend your time finding properties, not wrestling with formulas.