Every real-estate investor eventually lives by four numbers: NOI, cap rate, IRR and DSCR. They sound interchangeable, but each answers a different question. NOI tells you what a property earns. Cap rate tells you what that income is worth today. DSCR tells you whether the rent covers the loan. IRR tells you what the whole investment returned over the years you held it. Get the four straight and you can price a deal, finance it, and judge it at exit. This guide defines each one with a small worked example, shows how they connect, and explains why they belong on a single asset record instead of a fragile spreadsheet.
Start with NOI (net operating income)
NOI is the profit a property throws off from operations, before financing and before tax. Take the rent you actually collect (effective gross income, after vacancy and credit loss) and subtract the operating expenses the owner cannot pass on. In a German rental that distinction matters: umlagefähige Betriebskosten (apportionable running costs) flow through to tenants via the Nebenkostenabrechnung, so NOI counts only the owner's non-recoverable costs, namely management, maintenance reserve and non-apportionable items.
| Line item | Amount (EUR/year) |
|---|---|
| Gross potential rent | 120,000 |
| less vacancy and credit loss (5%) | -6,000 |
| Effective gross income | 114,000 |
| less non-recoverable operating expenses | -34,000 |
| NOI | 80,000 |
NOI is the engine. The other three metrics all read off it, which is exactly why an error in your operating cost line quietly poisons everything downstream.
Cap rate: the snapshot
The capitalisation rate is NOI divided by property value. With an NOI of 80,000 EUR on a value of 1,600,000 EUR, the cap rate is 5.0 percent. Read it two ways: as a yield (this asset earns 5 percent a year on its value, unlevered) and as a price (buyers in this market pay about 20 times NOI). Cap rate is a one-year, unlevered snapshot; it ignores your mortgage entirely and says nothing about next year. A lower cap rate means a higher price for the same income, which is why prime German residential trades at tight caps and secondary locations at wider ones.
DSCR: the lender's view
Debt service coverage ratio is NOI divided by annual debt service (principal plus interest). If the loan costs 64,000 EUR a year, DSCR is 80,000 / 64,000 = 1.25x. That means the property earns 25 percent more than it needs to pay the bank. Lenders set a floor, often around 1.20x to 1.25x for stabilised residential, below which they will not lend or will call a covenant breach. DSCR is the financing lens: same NOI, but now measured against the debt rather than the price.
IRR: the whole hold
Internal rate of return is the one metric that spans time. It is the discount rate that makes the net present value of every cash flow (the equity you put in, the cash the property returns each year, and the net proceeds when you sell) equal to zero. Because it discounts cash flows by their timing, a euro returned in year one counts for more than a euro in year five. Continuing the example with 400,000 EUR of equity and a five-year hold:
- Year 0: -400,000 EUR (equity in: 1,600,000 price less 1,200,000 loan)
- Years 1 to 4: +16,000 EUR each (NOI 80,000 less debt service 64,000)
- Year 5: +16,000 EUR cash flow plus 760,000 EUR net sale proceeds (sale 1,840,000 less remaining loan 1,080,000)
Solving for the rate that zeroes NPV gives an IRR of roughly 17 percent. Notice what IRR captures that cap rate cannot: leverage, rent growth, the amortised loan balance, and the timing and size of the exit. It is the number a fund reports to investors, and the base for a GP/LP distribution waterfall.
How the four relate
| Metric | Question it answers | Formula | Horizon | Includes debt? |
|---|---|---|---|---|
| NOI | What does it earn from operations? | Effective gross income minus operating expenses | One year | No |
| Cap rate | What is that income worth now? | NOI / value | Snapshot | No |
| DSCR | Can the rent cover the loan? | NOI / debt service | One year | Yes |
| IRR | What did the whole investment return? | Rate where NPV of all cash flows = 0 | Full hold | Yes |
Read together they tell one story: NOI feeds cap rate and DSCR directly and drives IRR through every year's cash flow. Change one lease and NOI moves; move NOI and all three shift. That is the whole problem with keeping them apart.
Why they belong on one record, not a spreadsheet
In a spreadsheet, NOI is typed once and copied into a valuation tab, a lender tab, and an IRR model that each drift the moment a tenant renews or a cost lands. On REPM, the numbers live on the property. The rent roll, non-recoverable costs and loan terms roll up into cash flow and financial metrics on the same Dataverse record, so cap rate, DSCR and IRR recompute when a lease or an actual cost changes, with no re-keying and no version called final_v7. Development costs tracked as DIN 276 cost groups form the basis IRR measures against, and the resulting IRR feeds a GP/LP distribution waterfall. Because it sits in Dataverse, the underlying booking records stay auditable and retained the way German GoBD expects. If you have been running returns in Excel, the case for a single source of truth is spelled out in REPM vs spreadsheets.
See it on your own numbers. Start a free REPM Lite trial at app.repm.cloud and watch NOI, cap rate, DSCR and IRR update from one property record.
FAQ
What is a good cap rate?
There is no universal number. Cap rate is set by the market for each asset class and location: prime German residential trades at low cap rates because buyers pay a high multiple for safe income, while secondary locations and riskier assets carry higher caps. A cap rate is only meaningful next to comparable sales in the same market, not as an absolute target.
Why can IRR look strong while DSCR is tight?
Leverage. Adding debt shrinks the equity you invest, which can lift equity IRR, but it also raises annual debt service, which shrinks DSCR. A highly leveraged deal can show an attractive IRR yet still fail a lender's minimum DSCR covenant, so the two must be read together, not in isolation.
Does NOI include the mortgage payment?
No. NOI is measured before financing and before tax, so debt service never enters it. The loan shows up in DSCR and in IRR instead. In a German rental, NOI also excludes apportionable running costs (umlagefähige Betriebskosten), because those pass through to tenants via the Nebenkostenabrechnung; only the owner's non-recoverable costs reduce NOI.
Can I just track these in a spreadsheet?
You can, but the four metrics drift apart the moment one input changes, because NOI is copied into separate tabs that update by hand. Keeping the rent roll, costs and loan terms on one property record recomputes all four together and keeps the underlying records auditable for GoBD retention.