The Go/No-Go Criteria

Professional investors use three quantitative thresholds to decide whether to pursue a deal: 8% or higher cash-on-cash return in year 1, debt service coverage ratio of at least 1.25x, and an 8x equity multiple by year 10. A deal that fails any of these is either overpriced or over-leveraged.

Key takeaways

• Cash-on-cash (year 1): 8%+ on your down payment equity. Anything under 6% is weak; 8%–12% is healthy; over 15% is rare and usually indicates risk.
• DSCR: Debt Service Coverage Ratio of 1.25x or better. This means NOI covers debt service by 25% margin. Banks require 1.20–1.35x; personal investors should target 1.25–1.50x.
• Equity multiple (year 10): 8x is a strong, realistic target for a ten-year hold. This implies 22–25% annualized IRR if spread over ten years.
• These criteria are minimums, not targets. A deal that hits 8% cash-on-cash, 1.25 DSCR, and 8x multiple is viable; one that beats these numbers is compelling.
• Using these gates prevents analysis paralysis and anchors the bid decision.

The 8% cash-on-cash rule

Cash-on-cash return (CCR) is the percentage return on your down payment (or invested equity) in year 1:

Cash-on-Cash = Year 1 Equity Cash Flow / Equity Invested × 100%

For a $1,000,000 property purchased with $250,000 down and $50,000 annual equity cash flow, cash-on-cash is $50,000 / $250,000 = 20%.

Why 8% as a minimum?

1. Opportunity cost: Treasury bonds yielded 4–5% in 2023–2024. A leveraged real estate deal should beat that by a meaningful margin (at least 300–400 bps).
2. Risk premium: Real estate is less liquid than bonds and has execution risk (tenant turnover, maintenance surprises). An 8% hurdle compensates for that.
3. Inflation protection: 8% in nominal terms is roughly 5% real (above inflation), matching historical real estate returns.

Interpretation:

• Under 4%: Deal is underwater or overleveraged. Walk.
• 4–6%: Weak. Only pursue if you believe strong appreciation will drive returns.
• 6–8%: Acceptable if other factors are strong (growing market, supply constraints, strong operator).
• 8–12%: Healthy. This is the target zone for most deals.
• 12–20%: Good, but question why. Is it because rents are cheap (good), or because leverage is extreme (risky)?
• Over 20%: Rare. Usually indicates either excellent underwriting or hidden risks (bad location, high turnover).

The 1.25x DSCR rule

Debt Service Coverage Ratio = Net Operating Income / Annual Debt Service

For a property with $100,000 NOI and $80,000 debt service, DSCR is 1.25x.

Why 1.25x?

1. Lender requirement: Banks typically require 1.20–1.35x DSCR at origination. This provides a buffer for operational volatility.
2. Refinancing ability: If you ever need to refinance, lenders check DSCR. If it's under 1.20x, refinancing becomes difficult or impossible.
3. Occupancy cushion: A DSCR of 1.25x means a 20% occupancy/income decline before the property can't cover debt service. That's a reasonable margin.

Calculation: If your NOI is $100,000 and you want DSCR of 1.25x, your debt service must be under $80,000. If your intended loan carries $90,000 debt service, you need to lower leverage (smaller loan) or negotiate better terms.

Interpretation:

• Under 1.0x: Can't cover debt service. Walk immediately.
• 1.0–1.20x: Tight. Property is vulnerable to occupancy or expense shocks.
• 1.20–1.25x: Acceptable for a bank loan, tight for personal investment.
• 1.25–1.50x: Healthy. You have a 25–50% buffer.
• Over 1.50x: Conservative. You're underleveraging, giving up returns, but gaining safety.

The 8x equity multiple rule

An equity multiple of 8x means you turn your initial $250,000 investment into $2,000,000 in ten years.

This is equivalent to a 22–25% annualized IRR, depending on the timing and distribution of returns. Why 8x?

1. Historical benchmark: 8x in a ten-year hold is a solid, achievable target for well-selected real estate in growing markets.
2. Inflation adjustment: Over ten years, with 3% average inflation, you need the investment to roughly quadruple in nominal terms to deliver meaningful real returns.
3. Competitive threshold: If you can't hit 8x on a real estate deal, the capital is better deployed in public equities, which historically return 10% annually (about 2.6x in ten years nominally, 1.7x in real terms, but with much lower risk and better liquidity).

The equity multiple includes cash distributions, principal paydown, and appreciation. It's the ultimate test: did you make money?

How to calculate:

1. Sum all cash distributions from years 1–10 (annual equity cash flow).
2. Calculate sale proceeds in year 10 (property value less remaining debt, less selling costs).
3. Subtract your initial equity investment.
4. Divide by initial equity investment to get the multiple.

Example:

• Initial equity: $250,000
• Cumulative cash flow years 1–10: $150,000
• Sale proceeds: $800,000
• Total gain: $150,000 + $800,000 − $250,000 = $700,000
• Multiple: ($150,000 + $800,000) / $250,000 = 3.8x (below 8x target)

This deal would fail the equity multiple test.

Interpretation:

• Under 2x: Poor return. Below inflation-adjusted bond yields. Walk.
• 2–4x: Below target. Only pursue if you believe strong appreciation is ahead.
• 4–6x: Acceptable but not compelling. Aim for better.
• 6–8x: On target. This is the expected outcome.
• 8–12x: Strong. Investigate to confirm assumptions are sound.
• Over 12x: Exceptional. Either you've found an outlier, or you're missing a risk.

The trade-off between criteria

These three metrics are somewhat independent but interdependent:

• A deal with high cash-on-cash but low DSCR is risky (overleveraged).
• A deal with low cash-on-cash but high DSCR is conservative (underleveraged).
• A deal with high cash-on-cash and low equity multiple suggests strong year-1 returns but weak appreciation (possible in slow-growth markets).

Combinations to watch:

Scenario	Interpretation
8% CCR + 1.25 DSCR + 8x multiple	Ideal. Balanced leverage, stable, solid returns.
12% CCR + 1.0 DSCR + 6x multiple	Risky. Overleveraged. Year 1 looks good, but refinancing risk is high.
4% CCR + 1.5 DSCR + 10x multiple	Underleveraged but appreciating fast. Returns are back-loaded (no year-1 cash, but strong exit).
6% CCR + 1.2 DSCR + 4x multiple	Weak across the board. Market or operator is challenged.

Using the criteria as gates

Professionals use these criteria as decision gates:

1. First gate: Does the deal have a year-1 cash-on-cash of 6% or better? If not, it's not worth analyzing further unless you have a specific operational improvement plan.

2. Second gate: Is DSCR 1.20x or better? If not, the deal is refinancing-risky.

3. Third gate: Does the pro forma show an 8x equity multiple at exit? If not, the ten-year return is insufficient.

A deal that fails any gate is a "no-go" without compelling reason (e.g., "This is a core asset in a trophy market, and I'm betting on 4% real appreciation for 15 years").

Real estate as an inflation-adjustment tool

One reason the 8x multiple works is that real estate is a good hedge against inflation. If inflation averages 2.5% and your property appreciates in nominal terms, you're gaining real wealth.

Assuming 3% annual appreciation (roughly in line with historical averages), a $1,000,000 property becomes $1,344,000 by year 10. That's a 34% gain in nominal terms, or about 4% real gain. Overleveraged (3x) on equity, this becomes a 12% real return on equity (before debt paydown and cash flow), which justifies the 8x equity multiple target.

When to deviate from the criteria

Professional investors deviate from these criteria in specific scenarios:

1. Value-add / repositioning: If you're buying a property at 6% cap rate but can execute a business plan to raise it to 7% cap rate through renovations or management improvement, the pro forma might show only 6% year-1 cash-on-cash but strong exit returns. This is justified if you can document the improvement plan.

2. Emerging markets with strong growth: In a high-growth market (Austin, Denver, Phoenix 2010–2020), buying at 4% cap rate and accepting 4% year-1 cash-on-cash was justified because appreciation was 4–5% annually, driving strong long-term returns.

3. Strategic hold for portfolio: If this property stabilizes your portfolio, provides diversification, or gives you a physical asset to anchor a platform, you might accept lower year-1 returns for strategic reasons.

4. Trading up: If you're selling a stabilized asset and buying a larger, more complex one, you might accept lower entry returns because the business-plan execution will be stronger.

But these are deviations, not the default. The default is: 8% CCR, 1.25x DSCR, 8x equity multiple. Anything less requires explicit justification.

The criteria as a bid anchor

When evaluating a property, work backward from the criteria:

1. Determine required year-1 cash-on-cash: 8% minimum.
2. Determine required DSCR: 1.25x minimum.
3. Determine required equity multiple: 8x in ten years.

These constraints determine:

• Maximum leverage (to satisfy DSCR)
• Maximum purchase price (to satisfy CCR)
• Required exit assumptions (to satisfy equity multiple)

If a property can't be purchased at a price that satisfies all three criteria and the lender's requirements, it's overpriced or unsuitable. Move on.

Decision framework flowchart

Related concepts

• The Pro Forma Spreadsheet
• Rent Vacancy Stress Test
• The 50 bps Stress Test

Next

You have metrics; now apply them to a real decision. Rent and value estimation are the inputs that determine whether a deal meets the criteria. We'll start with comp-based rent estimation.