When you’re evaluating a real estate investment, it’s easy to get overwhelmed by all the numbers. But understanding just a few essential terms can help you make smarter, more confident decisions. In this post, we break down four important metrics every investor should know:
📈 1. Annual Cash Flow
What it is:
Annual Cash Flow is the amount of money you make from a property each year after all expenses are paid.
Formula:Annual Cash Flow = Rental Income – Operating Expenses – Mortgage Payments
Why it matters:
Positive cash flow means your property is generating income — not just appreciating in value. It’s a strong indicator of financial health and sustainability.
Example:
If your property rents for $2,000/month and total monthly expenses (mortgage, taxes, insurance, maintenance) are $1,500, your annual cash flow is:($2,000 - $1,500) × 12 = $6,000
🏠 2. Property Equity
What it is:
Property Equity is the difference between your property’s market value and the amount you still owe on the mortgage.
Formula:Equity = Property Value – Loan Balance
Why it matters:
Equity builds over time as you pay down your mortgage and the property appreciates. It represents your ownership stake and can be tapped into for future investments or loans.
Example:
If your home is worth $300,000 and you owe $200,000, your equity is:$300,000 – $200,000 = $100,000
💵 3. Property Value
What it is:
Property Value is the current market value of your property — what it could realistically sell for today.
How it’s calculated:
Often based on comparable sales (comps), appraisals, or automated estimates (like Zillow’s Zestimate).
Why it matters:
Knowing your property’s value helps assess equity, price your home if selling, or determine if you’re getting a good deal when buying.
🔢 4. Cash-on-Cash Return (CoC ROI)
What it is:
Cash-on-Cash Return measures the annual return on the actual cash you invested, not the property’s total value.
Formula:Cash-on-Cash ROI = (Annual Cash Flow ÷ Total Cash Invested) × 100
Why it matters:
It’s one of the best ways to compare investment opportunities — especially if you’re using a loan and only putting down a portion of the purchase price.
Example:
If you invested $40,000 and your property gives you $6,000 in annual cash flow:(6,000 ÷ 40,000) × 100 = 15% CoC ROI
💡 ROI (Return on Investment)
🔹 Definition:
ROI measures the total return you earn on your investment relative to the total cost of acquiring and owning the property — whether it was paid in cash or financed.
🔹 Formula:
iniCopyEditROI = (Net Profit / Total Investment Cost) × 100
🔹 Includes:
- All money spent (down payment, closing costs, renovation)
- Mortgage principal paid
- Property appreciation
✅ Used to measure:
Overall profitability of the investment over time — including equity buildup and resale gains.
🎯 Final Thoughts
Understanding these four terms — Annual Cash Flow, Equity, Property Value, and Cash-on-Cash ROI — can help you evaluate deals more clearly and grow your real estate portfolio with confidence.
Want to try these calculations yourself? Check out our ROI Calculator ➜