Underwrite the assumptions.

Build a defensible net operating income

Begin with the rent roll and executed leases. Reconcile contractual rent, concessions, reimbursements and collections to operating statements. Deduct a supportable allowance for vacancy and credit loss, then recurring property operating expenses. NOI is calculated before debt service, income taxes and depreciation; capital expenditures and leasing costs need a separate cash-flow allowance.

Four measures, four different questions

Cap rate = annual NOI ÷ price

An unlevered income measure. Compare consistent expense treatments and in-place versus projected NOI. A higher cap rate can reflect greater risk.

DSCR = annual NOI ÷ annual debt service

A measure of debt coverage. Lenders may use a different underwritten cash flow or required coverage threshold.

Cash-on-cash return = annual pre-tax cash flow ÷ invested cash

Include acquisition costs and initial equity in invested cash; account for debt service and recurring capital needs in cash flow. It is not total return.

Debt yield = annual NOI ÷ loan amount

Relates property income to the loan balance without depending on the loan interest rate or amortization schedule.

An illustrative comparison

A hypothetical $1,000,000 purchase with $70,000 annual NOI has a 7.0% cap rate. With $50,000 annual debt service, DSCR is 1.40×. If annual capital and leasing allowances are $8,000 and total invested cash is $350,000, the resulting $12,000 pre-tax cash flow represents approximately 3.4% cash-on-cash return. These are teaching assumptions, not a listing, forecast or financing quote.

Stress-test the downside

• Reduce collected rent and increase vacancy.
• Model tenant rollover, renewal downtime and tenant improvements.
• Allow for insurance, tax and maintenance increases.
• Test refinancing at higher rates and a lower loan amount.
• Test an exit at a higher cap rate, including disposition costs.

Request the rent roll, leases, trailing operating statements, tax bills, insurance information and capital history before treating a marketing pro forma as evidence.

Educational information, reviewed November 1, 2026. Property-specific conclusions require verified records. Consult your CPA, attorney and lender about your transaction; brokerage analysis is not tax or legal advice.