real-estate-analysis

Real Estate Investment Analysis (NOI, cap rate, cash-on-cash, buy vs rent)

Core metrics — define the basis or the numbers lie

Gross yield      = annual gross rent / purchase price
EGI              = gross potential rent × (1 − vacancy rate) + other income
NOI              = EGI − operating expenses            (EXCLUDES debt service, capex reserve
                                                        varies by convention — state yours)
Cap rate         = NOI / purchase price (or market value)   ← unlevered, ignores financing
Net yield        = NOI / total acquisition cost (price + closing + initial repairs)
Cash-on-cash     = pre-tax annual cash flow after debt service / total cash invested
                   (down payment + closing + repairs)
DSCR             = NOI / annual debt service           (lenders commonly want ≥ 1.2)
OER              = operating expenses / EGI            (typical 35–50% long-term rental)
Monthly payment  = P × r(1+r)^n / ((1+r)^n − 1)        r = monthly rate, n = months

Two rules that catch most broken analyses:

1. Never quote a return without its basis. Gross vs net, price vs total acquisition cost, levered vs unlevered — a "7% yield" can be any of six different numbers.
2. Cap rate compares properties; cash-on-cash compares against your alternatives. Don't use a levered return to compare buildings, or an unlevered one to judge your own equity.

Operating expenses — itemize, never guess a lump

Property tax, insurance, maintenance/repairs (rule-of-thumb reserve ~1% of property value/yr or per local cost data), capex reserve (roof, HVAC — sinking fund, not "surprise"), property management (typically 8–10% of collected rent — include it even if self-managing; your time isn't free), HOA/service charges, utilities you pay, leasing/turnover costs, and vacancy (one month per year ≈ 8% is a common baseline — never 0%).

Buy vs rent — compare total unrecoverable costs

• Owning, unrecoverable: mortgage interest (not principal), property tax, insurance, maintenance, transaction costs amortized over the holding period, and the opportunity cost of the down payment invested elsewhere.
• Renting, unrecoverable: the rent.
• Principal paydown is forced savings, not a cost; appreciation is an assumption, not a fact — show the breakeven appreciation rate rather than asserting one.
• Holding period dominates: transaction costs (often 5–10% round trip) make short holds lose even in rising markets. State the assumed hold explicitly.