Introduction
Thinking about investing in real estate? 🏡 Not all deals are created equal. Two properties may look similar, but one can generate steady income while the other drains your finances.
That’s why the smartest investors know the numbers before they buy. In this blog, we’ll break down the three most important questions to ask before signing on the dotted line:
- What’s the Cap Rate?
- How’s the NOI (Net Operating Income)?
- Will the ROI meet your goals?
1. Cap Rate: The Snapshot of Returns
The Cap Rate is a quick way to estimate how profitable a property could be, based only on its income and purchase price.
Formula:
Cap Rate = Net Operating Income Ă· Property Value
- Higher Cap Rate = higher potential returns (but often higher risk).
- Lower Cap Rate = more stable investment (but lower returns).
👉 Example: If a property costs $800,000 and produces $56,000 in NOI annually, the Cap Rate is 7%.
Learn more about Cap Rate here
2. Net Operating Income (NOI): The Core of Profitability
NOI is your property’s income after subtracting operating expenses but before mortgage and taxes. It tells you how well the property generates profit on its own.
Formula:
NOI = Gross Rental Income – Operating Expenses
Expenses may include:
- Property management fees
- Maintenance & repairs
- Utilities
- Insurance and property taxes
A strong NOI means your property is covering expenses and generating real cash flow.
Learn more about NOI
3. ROI: Meeting Your Personal Goals
While Cap Rate and NOI look at the property itself, Return on Investment (ROI) considers your financing and personal goals.
Formula:
ROI = Annual Net Profit Ă· Total Cash Invested
👉 Example: If you invest $100,000 cash and earn $12,000 yearly profit, your ROI is 12%.
Learn more about ROI in real estate
FAQs: Evaluating Real Estate Investments
Q: Is a higher Cap Rate always better?
A: Not necessarily. Higher Cap Rates often mean higher risk or properties in less desirable locations.
Q: How do I know if my ROI is good?
A: Compare it with other opportunities (stocks, bonds, savings). For many investors, 8–12% ROI is considered strong.
Q: Should I only invest based on numbers?
A: Numbers are essential, but also consider location, growth potential, and tenant demand.
Conclusion
A property is a good investment when the Cap Rate, NOI, and ROI all align with your financial goals. By running the numbers before signing a contract, you can avoid costly mistakes and build a profitable portfolio.
Smart investors don’t just buy properties—they buy numbers that make sense.