Real estate investors are constantly on the watch for the next new deal. It’s a lot of work and most properties never even make it out of the starting gate. Why? Because the math just doesn’t work. Either the property is priced too high, the repairs cost too much or it simply won’t cash flow. Investors do 3 Quick Ratioshave ways to quickly determine whether or not a potential investment warrants further exploration. Here are three quick ratios real estate investors use.

Cap Rate. Short for “capitalization rate” this ratio is found dividing the annual net operating income by the purchase price. Net operating income is gross income less expenses but does not include the mortgage payment. Expenses are items such as maintenance, management fees, insurance and property taxes. If the net income is $30,000 and the purchase price $350,000, the Cap Rate is $30,000 divided by $350,000 = 8.57. Cap Rates are properly used when comparing similar properties in the same general area. The higher the cap rate, the better the return.

Cash on Cash. If you divide the amount of down payment (cash) you brought to the settlement table by the annual cash flow, you get the Cash on Cash return. This ratio compares your cash with the cash you receive each year. If you put down $50,000 for a property and the annual net cash flow is $5,000, the Cash on Cash return is $50,000 divided by $5,000 = 10.

Rent Ratio. This is a ratio found by dividing the monthly rent by the purchase price of the property. It’s a general number but one that can easily tell if the property has any potential at all. If a single family home sells for $200,000 and the rent is $2,750, the Rent Ratio is $2,750 divided by $200,000 = 1.38. Most real estate investors like to see at least a ratio of 1.00 while others won’t bother with it unless the number is above 2.00.

Again, these are just quick calculations that can easily tell you whether or not the deal might make sense but you still need to do more homework such as cost of repairs, purchase price, market rents and more. But these three ratios are the most common reasons most potential investments never make the cut.