# The five calculations every professional runs before lunch
A broker calls with a 40-unit apartment building. Asking price: $6.2 million. Net operating income: $372,000. Before the call ends, a real estate professional has already done three calculations in their head and knows whether this deal is worth a second look. That speed is not talent. It is repetition. Five formulas, run so often they become reflex.
This lesson walks through all five, with real numbers, so you can do the same math on a napkin.
Real estate underwriting (the process of evaluating a deal's risk and return before committing capital) leans on a small toolkit. You do not need a full discounted cash flowdiscounted cash flowDiscounted Cash Flow (DCF) is a valuation method that estimates an asset's value by projecting future cash flows and discounting them to present value using a required rate of return.View full definition → model to pass or fail a deal in the first ten minutes. You need:
1. Cap rate, how the market prices the asset's cash flow.
2. Cash-on-cash return, what the equity investor actually pockets.
3. DSCR, whether the lender will say yes.
4. Price per square foot, a sanity check against comparable sales.
5. Breakeven occupancy, how much vacancy the deal can absorb before it bleeds cash.
Each answers a different question. Together they triangulate a deal fast.
Capitalization rate (cap rate) = Net Operating Income (NOI) ÷ Purchase Price.
NOI is rental income minus operating expenses (property taxes, insurance, maintenance, management fees) but *before* debt service and taxes.
Worked example: the apartment building above.
NOI $372,000 ÷ Price $6.2 million = 6.0% cap rate.
Cap rates are how professionals compare an office tower in Frankfurt to a warehouse in Ohio. Lower cap rate means investors accept less yield, usually because they expect appreciation or view the asset as low risk (think prime Paris retail). Higher cap rate signals more perceived risk or less growth (think a secondary-market strip mall).
As of 2025-2026, US multifamily cap rates are running roughly in the 5% to 6% range for stabilized assets in major metros (estimate, varies significantly by market; see NCREIF for institutional benchmark data). European prime logistics assets have been trading in a similar 5% to 6.5% band per broker reports from CBRE and JLL (estimates, market dependent).
Cap rate ignores financing. Cash-on-cash return does not: it measures annual pre-tax cash flow relative to actual cash invested.
Cash-on-cash = Annual Pre-Tax Cash Flow ÷ Total Cash Invested.
Continue the example. Say the buyer puts 30% down: $1.86 million equity, borrowing $4.34 million. Assume annual debt service (loan payments, principal plus interest) of $290,000.
Pre-tax cash flow = NOI $372,000 − Debt service $290,000 = $82,000.
Cash-on-cash = $82,000 ÷ $1,860,000 = 4.4%.
Notice this is lower than the cap rate here, which means leverage is *not* helping this particular deal (this is called negative leverage, when borrowing costs more than the asset yields). When cash-on-cash exceeds the cap rate, leverage is working in the investor's favor.
Debt Service Coverage Ratio (DSCR) = NOI ÷ Annual Debt Service.
Lenders use this to check whether the property generates enough income to comfortably cover loan payments.
DSCR = $372,000 ÷ $290,000 = 1.28x.
Most US commercial lenders want a minimum DSCR of 1.20x to 1.25x for stabilized multifamily and commercial assets (estimate, varies by lender and asset class; CMBS and agency lenders like Fannie Mae and Freddie Mac publish their own minimums). European bank lenders often apply similar thresholds, sometimes stricter for riskier asset classes like hotels or development sites.
A DSCR below 1.0x means the property does not generate enough cash to cover its own debt. That is a red flag serious enough to kill a loan application outright.
This one is less a formula and more a gut check. Price per square foot (or per square meter in most of Europe) = Purchase Price ÷ Total Rentable Square Footage.
If the 40-unit building above totals 38,000 square feet:
$6,200,000 ÷ 38,000 = $163 per square foot.
The real skill is not the division. It is knowing the comparable range for that submarket. A professional who has looked at twenty deals in the same zip code knows instantly whether $163 is a steal or a red flag. This is why brokers and appraisers maintain comp sets (databases of recent comparable transactions), and why platforms like CoStar and Real Capital Analytics exist as paid infrastructure for exactly this check.
Breakeven occupancy = (Operating Expenses + Debt Service) ÷ Gross Potential Income.
This tells you the minimum occupancy rate needed just to cover costs, before any profit.
Say gross potential income (full occupancy rent roll) is $620,000, operating expenses are $248,000, and debt service is $290,000.
Breakeven occupancy = ($248,000 + $290,000) ÷ $620,000 = 86.8%.
If the submarket's average occupancy is 92%, there is a cushion. If average occupancy is 88%, this deal has almost no room for error, a single bad renewal season could push it into negative cash flow. This calculation is especially critical for hotels and office buildings, where occupancy swings are more volatile than multifamily.
Knowledge check
1. Why do professionals rely on a small set of five quick calculations instead of building a full discounted cash flow model when first evaluating a deal?
2. What does the cap rate primarily tell a real estate professional?
3. A prime asset in a top-tier market typically trades at a lower cap rate than a similar asset in a secondary market. What does this generally indicate?
4. Select ALL correct answers about Net Operating Income (NOI) as used in the cap rate calculation.
Select all the correct answers.
5. Select ALL correct answers about how the five core underwriting calculations work together.
Select all the correct answers.
Here is the discipline: never run one calculation in isolation. A 6% cap rate looks fine until DSCR comes back at 1.05x, which tells you the deal only works with far more equity than planned, which then drags cash-on-cash down to something unattractive. The five numbers check each other.
A useful gut-check sequence on any new deal:
1. Cap rate: is the going-in yield in the right neighborhood for the market?
2. DSCR: will a lender actually finance this at the assumed leverage?
3. Cash-on-cash: after realistic financing, what does equity actually earn?
4. Price per square foot: does this match recent comps, or is someone paying a premium (and why)?
5. Breakeven occupancy: how much room is there before the deal loses money?
If any single number looks abnormal relative to market benchmarks, that is the thread to pull before wiring any money.
Cap rates, DSCR minimums, and per-square-foot comps all move with interest rates and local supply and demand. Treat every number in this lesson as a 2025-2026 estimate, not a fixed rule. Good practice: check current quarterly cap rate surveys from CBRE, JLL, or Cushman & Wakefield, and cross-reference with NCREIF for US institutional data before relying on any single figure in a real underwriting decision.
🎬 [VIDEO: "How to Underwrite a Real Estate Deal in 10 Minutes" - youtube.com - search for real estate underwriting walkthroughs from CRE education channels like Break Into CRE or Adventures in CRE, which show these five calculations applied to live deal examples]