Real estate deal math.

The formulas that move every deal. DSCR, cap rate, LTV, ARV, debt yield, cash-on-cash, IRR — explained for ISOs and brokers, with worked examples. How small rate changes change loan amount qualification.

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The formulas

Seven metrics that move every deal.

DSCR (Debt Service Coverage Ratio)

DSCR = Net Operating Income / Annual Debt Service

Example: NOI = $90,000, Debt Service = $72,000 → DSCR = 1.25

DSCR loans qualify on this. 1.0 = breakeven, 1.25 = 25% cushion, 1.5+ = strong.

Cap Rate

Cap Rate = NOI / Property Value

Example: $100k NOI on $1.25M property = 8.0% cap rate

Unlevered annual return. Lower cap = higher valuation. Used to value commercial.

LTV (Loan-to-Value)

LTV = Loan Amount / Property Value

Example: $600k loan on $800k property = 75% LTV

Standard metric on stabilized property acquisitions and refis.

LTC (Loan-to-Cost)

LTC = Loan Amount / Total Project Cost

Example: $400k loan on $500k project (purchase + rehab) = 80% LTC

Used on construction and value-add. Total cost may exceed current value.

ARV (After-Repair Value)

ARV = projected value after renovation

Example: $200k purchase + $50k rehab on $400k ARV — lender may fund 70% of $400k = $280k

Fix-and-flip and BRRRR underwriting. Drives total loan amount.

Debt Yield

Debt Yield = NOI / Loan Amount

Example: $100k NOI on $1M loan = 10% debt yield

Agency commercial lenders require 8-10% minimum. Lender risk metric.

Cash-on-Cash Return

CoC = Annual Cash Flow / Total Cash Invested

Example: $12k annual cash flow on $100k down + $20k closing = 10% CoC

Investor ROI metric. Excludes appreciation; tracks cash returns only.

Rate impact

How rate changes affect loan size on DSCR.

Same property, same NOI, same minimum 1.25 DSCR. Different rates. Different max loan amounts.

Rate (30yr amort)	Monthly P&I (max)	Max loan	Δ vs 7.5%
6.5%	$6,000	$949,000	+$74k
7.0%	$6,000	$901,000	+$26k
7.5%	$6,000	$857,000	baseline
8.0%	$6,000	$817,000	-$40k
8.5%	$6,000	$779,000	-$78k
9.0%	$6,000	$745,000	-$112k

Assumption: Property NOI $90,000, target DSCR 1.25, max monthly P&I $6,000. Loan amounts rounded.

FAQ

Deal math, answered.

What is the DSCR formula?

DSCR = Net Operating Income / Annual Debt Service. NOI is gross rent minus operating expenses. Debt service is principal + interest payments. DSCR of 1.0 means breakeven; 1.25 means 25% cushion. Most direct DSCR lenders require 1.0-1.25 minimum.

What is cap rate?

Cap Rate = NOI / Property Value (or purchase price). Expresses unlevered annual return. A property with $100,000 NOI valued at $1,250,000 has an 8% cap rate. Lower cap = higher valuation. Cap rates vary by asset class, market, and quality.

How does LTV differ from LTC?

LTV (Loan-to-Value) = Loan / Property Value. LTC (Loan-to-Cost) = Loan / Total Project Cost. On stabilized acquisitions, LTV is used. On construction or value-add, LTC is used because the project cost may exceed current value. Fix-and-flip uses both — LTC during construction, LTV against ARV.

What is ARV?

ARV (After-Repair Value) is the projected value of a property after renovation is complete. Used in fix-and-flip and BRRRR underwriting. Lenders typically loan up to 65-75% of ARV. Example: $200k purchase + $50k rehab on a $400k ARV property — lender might fund 70% of $400k = $280k total.

What is debt yield?

Debt Yield = NOI / Loan Amount. Expresses what the lender's return would be if they took the property at the loan balance. Common commercial underwriting metric. A 10% debt yield means $100k NOI on $1M loan. Agency lenders typically require 8-10% minimum debt yield.

How do small rate changes affect a deal?

A 1% rate change on a $500k loan amortized over 30 years changes monthly payment by roughly $310. On DSCR underwriting, this directly affects coverage — pushing a marginal deal from approved to declined. Rate compression on the marketplace materially affects loan amount qualification.

Math wins. Source from direct lenders.

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Updated 2026-05-10