Real Estate Investing 101: Key Metrics to Watch

When it comes to commercial real estate investing, the numbers tell the truth. You can have a great-looking property in a prime location, but if the math doesn’t work, the deal won’t either. That’s where key real estate metrics come in; they help you see the full picture behind a property’s performance.

Our team uses metrics like Internal Rate of Return (IRR), Cash-on-Cash, Return on Initial Investment, and Return on Cost, which might sound technical, but they’re simply tools to measure how much money a property makes, how efficiently it runs, and whether it’s truly worth your investment.

Whether you’re analyzing your first deal or expanding your portfolio, understanding these numbers can turn guesswork into confidence. I'm going to walk you through the most important commercial real estate metrics, what they mean, how to use them, and how they can help you spot great opportunities.

Internal Rate of Return (IRR)

Probably the most commonly used metric in real estate is the Internal Rate of Return or IRR. IRR is a way to measure how much money you can make from a real estate investment over time. It’s not just about how much profit you earn; it also looks at when you receive that money.

Every investment has money going out (when you buy or fix up a property) and money coming in (like rent or sale proceeds). The IRR tells you the average annual return your money earns after accounting for all those cash flows.

IRR Example

Year	Cash Flow	Description
0	–$500,000	Initial investment
1	+$60,000	Rental income
2	+$60,000	Rental income
3	+$60,000	Rental income
4	+$60,000	Rental income
5	+$560,000	Rental income + sale

In this example, the investor puts in $500,000 at the start and receives rental income for five years. In the final year, they also sell the property for $500,000, resulting in a total of $560,000 received in year five.

When you calculate the IRR for these cash flows (using Excel or a financial calculator), the result is 12%. That means the investment grows at an average rate of 12% per year, considering both the rent and the final sale.

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Cash-on-Cash

Cash-on-Cash Return is one of the easiest ways to measure how well a real estate investment is performing. It tells you how much cash you’re earning each year compared to how much cash you invested. This is a metric we pay closer attention to on a cash-flowing asset that we plan on holding long-term.

Cash-on-Cash focuses only on actual money in and money out, so it isn't the best metric for understanding the overall picture of the asset.

Cash-on-Cash Example

Cash-on-Cash Return = (Annual Cash Flow ÷ Cash Invested) × 100

Let's assume we put down $100,000 on a property that is producing $10,000 in cash flow, in this case:

$10,000 ÷ $100,000 = 10% Cash-on-Cash Return

That means for every dollar you invested in cash, you’re earning 10 cents back each year, or a 10% annual return on your invested cash.

Cash-on-Cash Return is a great tool for comparing properties or deciding if a deal meets your income goals. It’s especially useful for investors using leverage since it only looks at your out-of-pocket investment.

However, it doesn’t account for long-term gains like appreciation, tax benefits, or loan paydown, so it’s best used alongside other metrics. In short, Cash-on-Cash Return helps you quickly see how much money your investment is putting back in your pocket each year, making it one of the most practical numbers for real estate investors to track.

Return on Cost (RoC) and Return on Equity (RoE)

Return on Cost and Return on Equity are metrics we typically use when analyzing our development projects. These are similar but give you a slightly different look at how a project will perform.

Return on Cost shows how much income a property produces compared to what it costs to build or buy and improve it.

Return on Cost Example

Return on Cost = Profit ÷ Total Project Cost

Let's assume we spend a total of $2,000,000 to build a single-tenant drive-thru project. We then sell that property after completion of construction for a $300,000 profit.

$300,000 ÷ $2,000,000 = 15% Return on Cost

That means for every dollar spent on the project, you’re earning 15 cents in profit over the course of the project.

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Return on Equity is similar, but rather than being based on the total cost of the project, it is based on the amount of money you need to complete the project if you have lending in place.

Return on Equity Example

Return on Equity = Profit ÷ Total Equity

Let's assume we spend a total of $2,000,000 to build a single-tenant drive-thru project. Say we borrow $1,250,000 and have to come up with the remaining $750,000 in equity. We then sell that property after completion of construction for a $300,000 profit.

$300,000 ÷ $750,000 = 40% Return on Equity

That means for every dollar spent on the project, you’re earning 40 cents in profit over the course of the project. A similar metric that people often use is Equity Multiplier, which would be shown as 1.40x, meaning if you take the equity put into the deal and times it by 1.40, you get the expected profit from the total project.

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Commercial real estate often comes across as complex and confusing, but understanding key metrics like the ones we have covered can simplify your analysis process and give you a quick understanding of a property and whether it is worth digging into further. Remember, numbers are important, and knowing how to use them will make a world of difference in your CRE investing.

Porter Anderson is our Finance Manager at Legend & Forza. He works alongside the brokers in our office to provide financial analysis to their clients, as well as managing the financing aspects of the development team.