Real Estate Investment Metrics: Cap Rate, NOI, DSCR, and Commissions
How cap rate, net operating income, DSCR, and real estate commission splits work together to evaluate an income property deal.
Evaluating an income property deal comes down to a handful of interconnected numbers, each answering a different question about the deal.
Net operating income: the foundation everything else builds on
NOI is effective gross income (rental income minus vacancy loss) minus operating expenses, deliberately excluding mortgage payments. $100,000 in gross income, $5,000 in vacancy loss, and $20,000 in operating expenses leaves $75,000 in NOI — the number every other metric below is built from.
Cap rate: return relative to price, independent of financing
Cap rate is NOI divided by property value. That same $75,000 NOI on a $500,000 property gives a 15% cap rate — a way to compare income properties independent of how any specific buyer finances the purchase, since it doesn't touch the mortgage at all.
DSCR: does the income actually cover the debt payments
DSCR is NOI divided by annual debt service. $75,000 NOI against $60,000 in annual mortgage payments gives a DSCR of 1.25 — most lenders want at least 1.20-1.25, meaning income needs to exceed debt payments by 20-25% before a loan is considered adequately covered.
Real estate commission: the transaction cost on the way in or out
A $450,000 sale at a 5.5% total commission rate produces $24,750 in commission, typically split between listing and buyer's agents — often 50/50, giving each side roughly $12,375, though the split and rate are both negotiable.
Reading a deal from every angle
NOI is the foundation, cap rate compares deals independent of financing, DSCR checks whether a specific loan is serviceable, and commission is the transaction cost to budget for. Run your own numbers with the cap rate calculator, net operating income calculator, DSCR calculator, and real estate commission calculator.