The numbers
The Four Numbers Every Commercial Deal Is Written In
Four numbers describe almost any income property. Learn how they connect and you can read a deal the way a lender does.
Net operating income (NOI)
NOI is what the property earns in a year after operating expenses but before the mortgage: income, minus taxes, insurance, management, repairs, utilities, and a reserve. It is the foundation every other metric is built on, so if the NOI is wrong, everything downstream is wrong. Work it out with the NOI calculator.
Cap rate
The capitalization rate is NOI divided by price, the unlevered yield of the property. It lets you compare two deals on the same footing and translate a rate into a price: at a given NOI, a lower cap rate means a higher value. Run it on the cap rate calculator.
DSCR (debt service coverage ratio)
DSCR is NOI divided by annual debt service, the ratio a lender sizes your loan on. A 1.25x DSCR means the property earns $1.25 for every $1.00 of loan payment. If a deal cannot clear the lender's minimum, the loan shrinks or the deal dies, which is why you underwrite to a real DSCR. Size it with the DSCR calculator.
Cash-on-cash return
Cash-on-cash is your annual pre-tax cash flow (NOI minus debt service) divided by the cash you actually put in. Cap rate describes the property; cash-on-cash describes your position in it after leverage, and it is the number to compare against other uses of your money. Check it on the cash-on-cash calculator.
How they connect
NOI feeds all three. Price and NOI give the cap rate; NOI and your loan give the DSCR; NOI, your loan, and your cash give cash-on-cash. Change one input and watch the others move: that is underwriting. Get comfortable moving between them and no listing can hide the truth from you.
Put it to work
Every one of these has a free calculator, and the underwriter computes all of them from your documents at once. Underwrite a deal free.
Questions
Which metric matters most?
NOI, because every other number is built on it. Cap rate, DSCR, and cash-on-cash all move the moment NOI changes, so a defensible, normalized NOI is the single most important thing to get right.
Does cap rate include the mortgage?
No. Cap rate is unlevered, income minus operating expenses only, so buyers with different loans can still compare the same property. Financing shows up in DSCR and cash-on-cash instead.
Related guides
Part of the RVP Underwriter guide library: practical guides to underwriting and buying income property. Browse all guides, or read the complete free guide with a full worked example.