Which Investment Metric Should You Use? 

A Straightforward Guide for Beginning CRE Investors and Veterans Alike 

Commercial real estate offers a buffet of return metrics—cap rate, IRR, cash-on-cash, GRM—and every investor seems to swear by a different one. Some metrics help you screen deals quickly; others allow you to compare long-term performance, evaluate cash flow strength, or determine whether it makes sense to sell or hold. While Institutional Real Estate investors are significantly more sophisticated than what is covered in this article, every analysis, big or small, starts with some back-of-the-napkin approach.  

There is no single “best” metric. The right one depends on the question you’re trying to answer. Below is a clear explanation of the major investment metrics, when to use them, and simple examples. Then we’ll look at how value-add investors size up deals with real problems—using the simple but brutally honest BON Method (not to be confused with Bacon’s Own Numbers).

1. Cap Rate — The Quick and Dirty Screening Tool

Formula: 

Cap Rate = NOI ÷ Purchase Price 

Cap rate is the simplest way to estimate value and compare income-producing properties. But an “appropriate” cap rate is not fixed—it varies based on risk, stability, asset type, and market conditions. 

What determines a cap rate: 

• Location quality 
• Tenant credit and lease strength 
• Asset type differences 
• Age, condition, and functionality 
• Market liquidity and investor competition 
• Income stability and rent growth potential 
• Interest rates and capital markets

Example: 

NOI: $120,000 

Price: $2,000,000 

Cap Rate = 6% 

2. Gross Rent Multiplier (GRM): The Multifamily Snapshot 

Formula: 

GRM = Price ÷ Gross Rent – or – Gross Rent × GRM = Value Estimate 

GRM is a quick way to compare multifamily assets when expense details are limited. It answers: “How many years of gross rent equal the purchase price?” 

Factors that dictate the appropriate GRM are similar to a Cap Rate and include: 

• Unit mix and rent levels 
• Building age and condition 
• Market rent growth expectations 
• Buyer competition 

Example: 

Gross Rent: $168,000 

Price: $1,680,000 

GRM = 10 

3. Cash-on-Cash (CoC) Return — “How Hard Is My Cash Working?” 

Formula: 

Annual Cash Flow ÷ Cash Invested 

Cash-on-cash return measures real money, right now. It shows the actual percentage return on the cash you personally put into the deal. 

Why veteran investors consider CoC the most meaningful metric: 

• It measures real cash, not paper value 
• It reflects leverage and financing structure 
• It shows operational performance immediately 
• It exposes real risk 
• It drives hold/sell decisions 

Example: 

Cash invested: $400,000 

Annual cash flow: $36,000 

CoC = 9% 

4. IRR – Your Annual Return Over Time

IRR is the annualized return your money earns when considering all cash in, all cash out, and the final sale, adjusted for the time value of money. It is the most comprehensive performance metric because it captures the entire investment lifecycle.  

IRR is beneficial when: 

• Cash flows are uneven
• Hold periods vary

• The sale proceeds make up a large portion of the total return 

• You want to compare two very different investment opportunities on equal footing 

Example: 

Assume you buy a property at $3M, hold 5 years with uneven cash flows, then realize net sales proceeds $3.8M. The IRR reflects the return for the investor’s holding period.  Assume that the annual cash flow (not rent) is:  year 1- $180,000, year 2- $140,000, year 3- $200,000, year 4- $215,000, and year 5- $225,000 plus $3,800,000 from the sale.  Your IRR is:  10.6% 

Annual cash flow (after expenses and debt service): 

• Year 1: $180,000 

• Year 2: $140,000 

• Year 3: $200,000 

• Year 4: $215,000 

• Year 5: $225,000 + $3,800,000 from the sale 

• IRR = 10.6% 

The IRR reflects the investor’s total return over the whole holding period, including the magnitude and timing of each cash flow. 

5. The BON Method (Back-Of-the-Napkin)

The BON Method is similar to using a cap rate because both are designed to give you a quick estimate of value. Cap rates help investors ballpark a property’s value today based on NOI; the BON Method does the same for future value once the building is stabilized. In that sense, BON is an overly simplistic reversion analysis. 

A Reversion analysis provides a preliminary price that pencils if you are going to undertake the stabilization of an existing property.  Typically, this is referred to as Land Reversion. Still, for an existing property, I call it the Back-of-the-Napkin Analysis (BON), which estimates the property’s value at the end of the holding period after the value-add business plan is executed. In full underwriting models, reversion analysis involves forecasting NOI, applying an exit cap rate, adjusting for selling costs, and discounting the result back to present value. It is typically detailed, assumption-heavy, and sensitive to small changes. 

The BON Method deliberately strips away all that complexity. Instead of modeling multiple future scenarios, rent growth curves, expense escalations, exit cap rate drift, and selling costs, BON asks a more straightforward question: 

What will this building be worth once stabilized, and what is the cost to get there? 

By comparing the stabilized value to the all-in cost basis, BON gives investors a quick way to assess the viability of a value-add investment – without having to build a full discounted cash flow model. It is not meant to replace full underwriting, but the BON is used to determine whether a deal deserves the time and resources required for deeper analysis (Full Underwriting.) 

Step 1 — Determine Stabilized Value (cap rate) 

Stabilized NOI: $360,000 

Market Cap: 6.5% 

Stabilized Value ≈ $5.54M 

Step 2 — Subtract Real Costs to Get There 

TI (6,000 SF × $5): $30,000 

Lost Rent (6 months): $50,000 

Leasing Commissions: $30,000 

Capital Improvement:  $25,000 

Contingency: $50,000 

Total Costs: $185,000 

Step 3 — BON Value (As-Is Target Price based on Cap Rate) 

$5,538,461 – $185,000 = $5.35MM 

6. If You Require a 7% CoC Return once it is stabilized:

Let’s say that you want a 7% cash-on-cash return once the property is stabilized.  Since you know that the NOI will be $360,000, you can figure out what you can pay for the property.  $360,000 is 7% of $5,142,857.  Well, just like the BON, you have to subtract the cost to stabilize:   

Max purchase price = $5,142,857 – $185,000 = $4,957,857 

Max Price ≈ $4.96MM on an all-cash basis.    

If the cost of money (the loan interest rate) is lower than the cap rate, you can achieve a higher cash-on-cash return by financing the purchase.   

So, while the 6.5% cap rate justifies a purchase price of $5.35MM, if you are looking for a 7% CoC, you can only pay about $5MM. 

BON forces the question: “What will this building be worth when stabilized—and what does it truly cost to get it there?” 

The BON Method works for virtually any real estate purchase, even a single-family residential investment or a vacant parcel of land.