The Five Numbers Every Investor Should Know by Heart
March 16, 2026
|By Tanner Sherman, Managing Broker
Most investors can tell you their cap rate. Ask them five more questions and the conversation falls apart. Those five questions are the difference between building wealth and guessing.
I sat across from an investor last month who wanted to buy a 12-unit building. He had the capital. He had the motivation. He had watched 200 hours of YouTube videos about real estate investing.
I asked him what the cap rate was on the deal he was looking at. He said, "I think it's good?"
I asked him what DSCR the lender would require. Blank stare.
He had the money to buy a building but not the literacy to evaluate whether he should. That's a dangerous combination.
There are five numbers that define the financial health of every real estate investment. If you can't calculate them, explain what they mean, and tell me what "good" looks like for each one, you aren't ready to write a check. That isn't gatekeeping. That's protecting your capital.
Here they're.
1. Net Operating Income (NOI)
What it's: The total income a property generates minus all operating expenses, before debt service and capital expenditures.
How to calculate it:
NOI = Gross Income - Vacancy Loss - Operating Expenses
Gross income includes rent, laundry, parking, pet fees, utility reimbursements, and any other revenue the property generates. Operating expenses include property taxes, insurance, management fees, maintenance, utilities (owner-paid), landscaping, administrative costs, and reserves.
Operating expenses do not include mortgage payments, depreciation-actually-works), or capital expenditures. Those are below the NOI line.
Why it matters: NOI is the foundation of every other metric on this list. If your NOI is wrong, everything downstream is wrong. It's also the basis for property valuation in commercial and multifamily real estate. A property's value is its NOI divided by the cap rate. Get NOI right and you can value anything.
What good looks like: There's no universal "good" NOI. It depends on property size, location, and price. What matters is the NOI trend. Is it growing year over year? Is it growing faster than expenses? Is it in line with or above comparable properties in the same submarket?
Common mistake: Using the seller's or broker's pro forma NOI instead of calculating it yourself from verified financials. Pro forma NOI is a fantasy. Actual NOI is a fact. Make decisions based on facts.
2. Cap Rate (Capitalization Rate)
What it's: The ratio of NOI to property value (or purchase price). It tells you the unlevered yield on the property, meaning the return you would earn if you paid all cash.
How to calculate it:
Cap Rate = NOI / Property Value (or Purchase Price)
A property generating $80,000 in NOI purchased for $1,100,000 has a cap rate of 7.27%.
Why it matters: Cap rate serves two purposes. First, it's a valuation tool. If you know the market cap rate for comparable properties and you know the NOI, you can calculate what a property should be worth. Second, it's a comparison tool. It lets you compare the yield on different properties, different markets, and different asset classes on an apples-to-apples basis.
What good looks like in 2026:
Class A multifamily, Omaha: 5.0-6.0%
Class B multifamily, Omaha: 6.0-7.5%
Class C multifamily, Omaha: 7.0-9.0%
Commercial (retail/office), Omaha: 7.0-10.0% depending on tenant quality and lease term
Lower cap rates mean higher prices relative to income. Higher cap rates mean lower prices relative to income but typically more risk or more operational intensity.
Common mistake: Thinking a higher cap rate is always better. A 10 cap in a declining neighborhood with deferred maintenance isn't a "better deal" than a 6 cap in a growing submarket with stable tenants. Cap rate reflects risk. Higher cap rates exist because the market is pricing in higher risk. Understand why the cap rate is what it's before you get excited about the number.
3. Debt Service Coverage Ratio (DSCR)
What it's: The ratio of NOI to total annual debt service (mortgage payments). It measures how comfortably a property's income covers its debt obligations.
How to calculate it:
DSCR = NOI / Annual Debt Service
A property with $80,000 NOI and $62,000 in annual mortgage payments has a DSCR of 1.29x.
Why it matters: DSCR is the number your lender cares about most. It tells them whether the property generates enough income to pay the mortgage with room to spare. If the DSCR drops below 1.0x, the property's income doesn't cover the debt. That's a default scenario.
What good looks like: Most commercial and multifamily lenders require a minimum DSCR of 1.20x to 1.25x. That means the property needs to generate 20-25% more income than the mortgage payment.
In 2026, with rates where they're, I wouldn't buy anything with a DSCR below 1.25x at close. And I want my underwriting to show at least 1.15x under stress-test conditions (10% vacancy, 5% expense increase).
What it looks like at different levels:
1.0x: Break-even. Every dollar of NOI goes to debt service. No margin for error.
1.15x: Thin. One bad quarter and you're below 1.0x.
1.25x: Adequate. Industry standard minimum. Some cushion.
1.40x+: Comfortable. This is where you want to be if you like sleeping at night.
Common mistake: Calculating DSCR using pro forma income instead of actual trailing income. Your lender will use actual numbers. You should too.
4. Cash-on-Cash Return (CoC)
What it's: The annual pre-tax cash flow divided by the total cash invested. It measures the return on your actual out-of-pocket investment.
How to calculate it:
Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested
If you invested $250,000 (down payment plus closing costs plus initial improvements) and the property generates $22,000 per year in cash flow after all expenses and debt service, your cash-on-cash return is 8.8%.
Why it matters: This is the number that tells you what your money is actually doing. Cap rate shows the unlevered yield. Cash-on-cash shows your levered yield, meaning the return on the dollars you actually put in, after accounting for the mortgage.
Leverage amplifies returns in both directions. A property with a 7% cap rate financed at 6.5% generates minimal cash-on-cash. The same property financed at 5.5% generates significantly more. The property didn't change. The leverage did.
What good looks like: In the current rate environment, I target 8-12% cash-on-cash on stabilized acquisitions. Value-add-playbook-for-b-and-c-class-multifamily) deals might show 4-6% in year one and grow to 10-14% after the business plan is executed.
If a deal shows less than 6% cash-on-cash stabilized, I question whether the risk of real estate ownership is justified versus simply putting that capital into an index fund or a REIT.
What it doesn't capture: Appreciation, principal paydown, and tax benefits. Cash-on-cash is a cash flow metric only. It doesn't tell you the total return picture. That's why you need it alongside cap rate and NOI, not instead of them.
Common mistake: Forgetting to include all cash invested. Your denominator isn't just the down payment. It includes closing costs, loan fees, initial repairs, and any capital invested before the property stabilizes. If you put in $250,000 total but only count the $200,000 down payment, your cash-on-cash looks better than it really is.
5. Expense Ratio (Operating Expense Ratio)
What it's: Total operating expenses as a percentage of gross income. It measures operational efficiency.
How to calculate it:
Expense Ratio = Operating Expenses / Gross Income
A property with $180,000 in gross income and $79,200 in operating expenses has a 44% expense ratio.
Why it matters: This is the number that tells you how efficiently the property is being managed. Two identical buildings in the same submarket with the same rents can have wildly different returns if one runs a 40% expense ratio and the other runs 55%.
The expense ratio is also the number that reveals operational upside. If you buy a building running at 55% and you can bring it to 42%, you have just created substantial value without raising rents a single dollar.
What good looks like:
Class A: 30-38%
Class B: 38-46%
Class C: 48-58%
If your Class B building is running above 48%, there's money on the table. If your Class C building is running above 60%, something is actively wrong with the operations.
Common mistake: Using the "50% Rule" as a universal benchmark. I wrote an entire post about why that number is unreliable. The reality is that expense ratios vary dramatically by property class, age, location, and management quality. Use actual data for your specific property class in your specific market.
How These Five Numbers Work Together
Here's the thing most investors miss. These numbers aren't independent. They're interconnected, and a change in one ripples through the others.
Increase NOI and you improve cap rate (on a valuation basis), improve DSCR, improve cash-on-cash, and have likely improved your expense ratio.
Increase expenses and your expense ratio goes up, NOI drops, DSCR tightens, cash-on-cash falls, and the property is worth less.
Increase leverage (more debt) and your cash-on-cash might go up if the cap rate exceeds the interest rate, but your DSCR drops and your risk increases.
These five numbers tell a complete story about the financial health of an investment. No single number tells you whether a deal is good or bad. But together, they tell you everything.
The Literacy Test
Here's my challenge. For every property you own or are evaluating, you should be able to state all five numbers from memory:
What's the NOI?
What's the cap rate at your basis?
What's the DSCR?
What's the cash-on-cash return?
What's the expense ratio?
If you can't answer all five, you don't know your property well enough. And if you're evaluating an acquisition and the seller or broker can't provide the data you need to calculate all five, that tells you something too.
These aren't advanced metrics. They aren't Wall Street jargon. They're the basic vital signs of a real estate investment. Know them by heart. Calculate them monthly. Track them over time. They will tell you when things are going well, and they will warn you before things go wrong.
The cost of not knowing these numbers isn't embarrassment. It's writing a six-figure check for a deal that looked good because you didn't know how to prove it was bad.
For weekly market insights and real operator perspective, catch the Freedom Fighter Podcast on Spotify, Apple, or YouTube.
Tanner Sherman is the Principal and Managing Broker of Top Tier Investment Firm in Omaha, Nebraska. He co-hosts the Freedom Fighter Podcast with Ryan of Avara Investments.
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The Difference Between Asset Management and Property Management
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