Look, I’m gonna tell you something nobody talks about.
Math. Not the boring stuff you did in school. I’m talking about the math that makes money.
The numbers that tell you—hey wait—should I buy this thing or not?
I talk to investors every day.
Smart people. Rich people. And you know what? They all use these same seven math tricks before they put a single dollar down.
Not complicated stuff. Just simple math that works.
You ready? Let’s go through these together.
And trust me, knowing these seven things will change how you look at every deal that comes your way.
How Every Investors Rely On Before Closing Any Deal
So here’s the deal—before investors sign those papers, they’re running numbers.
Not just random numbers.
Specific calculations that tell them if they’re about to make money or lose their shirt.
They’re looking at stuff like—when will I get my money back? How much cash will this thing generate? What’s my actual return gonna be? How risky is it really?
Let’s break these down one by one. Real simple.
The way actual investors talk about them.
The Break-Even Point: Knowing When Profit Starts
Okay so break-even point.
Super simple idea but crazy powerful.
It’s just—at what point do I stop losing money and start making money?
Let’s say you buy a rental property for $200,000.
You spend $1,000 a month on mortgage, taxes, insurance, all that. And you rent it out for $1,500 a month.
So each month you’re making $500. That’s $6,000 a year.
So when do you break even on your initial investment? $200,000 divided by $6,000… that’s about 33 years!
Wait—that sounds terrible! But that’s not counting appreciation, tax benefits, principal paydown.
See how just knowing the break-even point makes you think twice?
Smart investors, they calculate this for everything.
Properties, businesses, stocks—when do I get my original money back? If that number is too big, they walk away. Simple as that.
Cash Flow Projections: The True Health of a Deal
Now cash flow—this is the lifeblood, the heartbeat of any investment.
Not profit on paper.
Not what might happen someday.
But actual money coming in minus money going out. Every month. Every year.
I talked to this investor last week.
She told me—”I don’t care about anything else if the cash flow isn’t there.” And she’s right!
You gotta account for everything.
Not just the obvious stuff.
All the sneaky expenses too.
Property management. Vacancies. Home Repairs.
Capital expenses like replacing the roof or AC units.
What happens if rents drop 10%? What if expenses go up? Run those numbers too.
The trick here? Always assume worse cash flow than what looks likely.
Cut your income projections by 10%. Add 15% to your expenses.
If it still makes money, now you might have a good deal.
ROI vs. IRR: Measuring Real Returns
ROI and IRR. Sounds fancy but it’s not. ROI is return on investment.
Super basic. If I put in $100 and get back $110, that’s a 10% ROI.
But IRR—Internal Rate of Return—that’s different. That’s about time.
When do I get my returns? Sooner is better than later.
Look at two deals: Deal A: Put in $100,000, get $150,000 back in 5 years.
Deal B: Put in $100,000, get $150,000 back in 2 years.
Same ROI—50%. But which one’s better? Deal B! Because you get your money back faster.
That’s what IRR measures.
The time value of money.
Most investors want at least 15% IRR on risky stuff like real estate development.
Maybe 8-10% on safer investments.
The trick? Don’t just ask “how much will I make?” Ask “how much will I make PER YEAR?” Big difference.
The Debt-to-Income and Leverage Ratios
Alright, debt-to-income ratio.
This is huge. How much of your income goes to paying debts?
For rental properties, most investors use something called the “debt service coverage ratio.” It’s just—how much income compared to the debt payments?
If your property makes $1,000 a month and the loan payment is $700, your ratio is 1.43. Most lenders want at least 1.25.
Smart investors want 1.5 or higher.
Gives you room when things go wrong.
And leverage—that’s just how much you borrow compared to the total value.
Buy a $100,000 property with $20,000 down? That’s 80% leverage.
More leverage means more risk AND more potential return. It’s a double-edged sword.
During good times, everyone loves leverage. During bad times? It’s what kills investors.
The best investors I know—they keep their leverage lower than what banks allow.
Just because you CAN borrow 80% doesn’t mean you SHOULD.
The Cap Rate and Valuation Metrics
Cap rate. This is important. It tells you what return you’d get if you paid all cash for a property.
Take the net operating income—that’s your rental income minus ALL expenses except your mortgage.
Divide that by the property value. That’s your cap rate.
So a property worth $200,000 that nets $14,000 a year has a 7% cap rate.
This is where cap rate calculation becomes super useful.
Lower cap rates mean lower returns but usually safer investments.
Higher cap rates mean higher returns but usually more risk.
In nice neighborhoods in big cities? Maybe 4% cap rates. In tougher areas? Maybe 10% cap rates.
Smart investors compare the cap rate to interest rates.
If you can borrow at 5% but the cap rate is only 4%, you’re losing money every year! The math doesn’t work.
Risk-Adjusted Returns: Beyond Just Profitability
Let’s talk about risk. Two investments. Both promising 10% returns.
One is in a stable area with good job growth.
The other’s in a declining neighborhood with one major employer that might leave.
Same return on paper. Totally different risk.
Smart investors adjust their return expectations based on risk. Higher risk? They demand higher returns. Maybe 20% or more annually.
Lower risk? Maybe they’ll accept 8%.
How do you calculate this? It’s not an exact science.
But you can use something called the “Sharpe ratio” to compare investments. Or just add risk premiums to your required returns.
If Treasury bonds pay 4% with basically no risk, maybe you need at least:
- 8% for safe real estate
- 12% for value-add projects
- 20% for development deals
The math here is simple: more risk should equal more reward. If it doesn’t, walk away.
Exit Strategy Numbers: Knowing When to Walk Away
Last one—exit strategy. Most investors mess this up. They think about getting IN but not getting OUT.
You gotta run the numbers on selling or refinancing before you buy.
What will the property be worth in 5 years? What if the market drops 10%? What if it goes up 20%?
Calculate your total return under different scenarios. And always have a Plan B.
Maybe your plan is to refinance in 3 years to pull cash out.
What if interest rates jump 2%? Run those numbers too.
The best investors I know—they have three exit plans for every deal. The dream scenario.
The most likely scenario. And the “oh crap” scenario. If the worst-case numbers still work, it might be a good deal.
Conclusion
The math isn’t complicated. It’s just about being honest with the numbers.
No wishful thinking. No best-case-only calculations.
These seven math concepts are what real investors use every single day. Break-even points.
Cash flow projections. ROI vs IRR. Debt ratios. Cap rates. Risk adjustments. Exit strategies.
Master these and you’ll start seeing investments completely differently.
You’ll spot good deals faster. You’ll avoid disasters that look good on the surface.
And remember—the best investment you’ll ever make is turning down a bad deal.
The math either works or it doesn’t. Listen to what the numbers tell you.
That’s it. No magic. Just math that works.
Try these on your next potential deal and see what happens.
