Real estate investing is fundamentally a numbers game. Properties that look good on the surface โ€” attractive neighborhood, renovated kitchen โ€” often pencil out terribly when you run the actual numbers. Here’s the analysis framework professional investors use.

Number 1: Gross Rent Multiplier (GRM)

GRM = Purchase Price รท Annual Gross Rent. Example: $240,000 property renting for $2,000/month ($24,000/year). GRM = 240,000 รท 24,000 = 10. Lower GRM = better value. Target under 10 in most markets, under 8 in high-yield markets. GRM is a quick screening tool โ€” not a final analysis.

Number 2: Cap Rate

Cap Rate = Net Operating Income รท Property Value. NOI = annual rent minus operating expenses (vacancy, repairs, property management, taxes, insurance). Example: $24,000 rent โ€“ $8,000 expenses = $16,000 NOI. $16,000 รท $240,000 = 6.7% cap rate. Target cap rates vary by market: high demand (LA, NYC): 3โ€“5%. Mid-market (Atlanta, Dallas): 5โ€“8%. High-yield markets: 8โ€“12%.

Number 3: Cash-on-Cash Return

CoC = Annual Cash Flow รท Total Cash Invested. This is your actual return on the money you put in. Example: $60,000 down + $10,000 closing costs = $70,000 invested. Annual cash flow after all expenses including mortgage: $5,600. CoC = $5,600 รท $70,000 = 8% cash-on-cash return. Target: 8โ€“12% or higher.

Numbers 4 and 5: The 1% Rule and the 50% Rule

1% Rule: monthly rent should be โ‰ฅ 1% of purchase price ($240,000 ร— 1% = $2,400/month minimum). Harder to find in expensive markets but a useful quick filter. 50% Rule: assume 50% of gross rents will go to operating expenses (not including mortgage). Use this to quickly estimate NOI without detailed analysis.

๐Ÿ’ก
The Analysis Takes 30 Minutes
Earn: Worth every minute
Building a simple spreadsheet with these 5 calculations takes 30 minutes. Running every prospective property through it before making offers separates real estate investors from real estate speculators.