The 3 Big Numbers in Real Estate

The simple framework I use to separate good deals from bad ones.

Author

Dakota Crisp, PhD
August 25, 2025

In partnership with

When I look at a property to see if it’s a good investment, I boil it down to three big numbers. Together, they give you a full picture of both the intrinsic value of the property and the leveraged return you can expect as an investor.

1. Cap Rate – The Property’s “Intrinsic Value”

The first number is the cap rate (capitalization rate). It tells you how much cash the property generates relative to its price.

The formula is simple:

Cap Rate = Net Operating Income ÷ Purchase Price

If you flip the cap rate, you basically get the equivalent of a P/E ratio in stocks. A higher cap rate means more income for every dollar you pay. But is higher always better? Not necessarily.

  • Low Cap Rate: Usually in prime locations, with stable rent and high-quality tenants. Investors bid up prices, which pushes cap rates down.

  • High Cap Rate: Could mean higher cash flow, but also higher risk—like lower-quality tenants, high turnover, or expensive repairs.

How do you actually use this number? One key way is to compare it against your borrowing rate.

  • If the cap rate is higher than your loan interest rate, using debt can amplify returns.

  • If the cap rate is lower, debt financing can actually hurt returns.

2. Cash-on-Cash Return – The Investor’s Lens

While cap rate shows the property’s raw earning power, cash-on-cash return (COCR) tells you how much cash you’re actually pocketing as the investor after expenses and debt service.

The formula:

COCR = (Annual Net Operating Income – Debt Service) ÷ (Equity Invested)
(Equity = down payment + renovation costs)

This number reflects the return on the actual cash you put into the deal.

Years ago, influencers would say you should only buy properties with a 15%+ COCR. Today, with higher interest rates and property prices, that’s much harder to find unless you’re doing a heavy value-add project.

3. Total Return – The Full Picture

The last number is total return, which captures all the ways you make money in real estate. I break it down into three streams:

  1. Cash Flow: Monthly income after debt repayment. This is the numerator in the COCR formula.

  2. Appreciation: Growth in the property’s value over time.

  3. Equity Recapture: Each month, part of your mortgage payment goes toward principal. Since this is paid with rental income, it’s effectively forced savings in your pocket.

When you add these streams together and divide by your equity invested, you get the total return on your investment.

Context and Caveats

Now, a word of caution.

When real estate gurus pushed the “15% COCR rule,” they were trying to anchor investors to what actually matters: cash flow.

Why? Because in the short term, the other two streams are small or uncertain.

  • Equity Recapture: In the first few years, it’s tiny—maybe 0.7% of the purchase price.

  • Appreciation: While values tend to rise long-term, it’s never guaranteed in the short-term. Prices move in lumps, not straight lines.

That’s why, if you’re planning to sell in under five years, it’s conservative to ignore appreciation and equity recapture in your underwriting.

But if you’re a long-term investor like me, it makes sense to include them. Because eventually, those forces show up.

The Bottom Line

Cap rate tells you if the deal makes sense on paper.

Cash-on-cash tells you what you, the investor, actually earn.

Total return reminds you of all the hidden ways real estate builds wealth over time.

Learn these three numbers, and you’ll have the tools to cut through hype and evaluate any property like a professional.

If you don’t want to run the numbers yourself, I built a free Real Estate Investment Calculator that does the heavy lifting for you. You can check it out here:

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