Sometimes, real estate is all about math

We’ve all heard the saying: Real estate is about location, location, location. And yes—location is a critical driver of success. But there’s another truth that business owners and investors often learn the hard way:

Real estate is also about the math, the math, and the math.

Whether you’re opening a new franchise or buying an investment property, the numbers must work. A great corner or prime visibility doesn’t matter if the financials don’t add up.

1. For Franchisees: Know Your Ratios

If you’re a franchisee, your real estate decision should be tied directly to projected revenue. As a general rule, your total occupancy cost—which includes rent, CAM, property taxes, and insurance—should be no more than 8% of your gross sales. Corporate and national operators often aim even lower, targeting 7% or less.

The key? Accurate sales forecasting. Your projections should be based on solid data—demographics, traffic counts, market comps—not wishful thinking.

For example:
If your all-in rent is $75,000 per year, your projected sales should be at least $937,500 annually ($75,000 ÷ 0.08).

• If you outperform the projection, great—your profits increase.
• But if sales fall short, that same location becomes a drag on the business.

Sometimes, the numbers will tell you to walk away from a good site because the sales won’t support it. Other times, a more expensive site may still be the right choice—if the projected sales justify it. The takeaway: Work closely with your franchisor and brokers to base every decision on realistic, math-backed expectations.

2. For Investors: It’s Not Just the Cap Rate—It’s the Return

Real estate is a powerful way to build wealth—through annual income and long-term appreciation. But for investors using financing, the math between the cap rate and the interest rate must work.

Let’s say you’re looking at a national-credit NNN investment with a new 15-year lease.

• Annual rent: $200,000
• Asking cap rate: 5.75%
• Implied price: $3,478,000
• Typical financing: 25% down ($869,500), 75% loan ($2,608,500)
• Interest rate: 6.5%
• Amortization: 20 years

Your annual debt service in this case is about $233,000—which exceeds the $200,000 in rental income. That’s a losing position.

To break even on debt service, you’d need to reduce the loan to around $2,235,000—about 65% loan-to-value. And even then, your return on equity will be lower than the cap rate.

Bottom line: When interest rates are higher than cap rates, you either need:

• More equity in the deal, or
• A lower purchase price, or
• A property with stronger income (higher NOI)

If none of those factors align, the math doesn’t work.

The Bottom Line

Real estate decisions should always be filtered through a financial lens. Great deals aren’t just found in high-traffic corridors or booming zip codes—they’re found when the math works.

Whether you’re leasing space, acquiring a property, or evaluating an investment, run the numbers first. When the location is right and the numbers pencil out, that’s when you win.