Run The Numbers on Commercial Real Estate Investments in 5 Minutes (Or Less)
So, you want to invest in commercial real estate—but every deal you analyze just doesn’t seem to pencil out. Maybe you’re stuck figuring out if a property is actually profitable. Maybe you're overwhelmed by all the financial metrics investors throw around.
Don’t worry—you’re not alone.
Commercial real estate numbers can feel complex. Cap rates, net operating income (NOI), debt service coverage ratios—it’s a lot to digest. But the good news? You don’t need a finance degree to run the numbers like a pro.
In fact, I’ll show you how to analyze any commercial real estate deal in any market in under five minutes so you can confidently move forward on your next (or first!) investment.
Step 1: Know Your Investment Return Goals
Before you start crunching numbers, take a step back and ask yourself:
What return makes this deal worth it for me?
Not every investor has the same financial goals, and what makes a “good deal” varies based on your risk tolerance, investment timeline, and financial strategy.
For example, some investors aim for an 8% cash-on-cash return—a common benchmark in commercial real estate. Others focus on doubling their money every five years, which translates to an average 15% annualized return when factoring in appreciation, rental income, and leverage.
Personally, I follow the five-year doubling rule: If I invest $100,000 today, I expect it to grow to $200,000 in five years. That means I need to structure deals where rental income, property appreciation, and strategic financing align with this goal.
How to Define Your Ideal Return:
Are you looking for steady cash flow or long-term appreciation?
Do you want high returns, or are you comfortable with lower-risk investments?
Are you willing to invest in value-add deals that require renovations and active management?
Once you set your ideal return metric, it becomes your filter for analyzing deals. If a property doesn’t meet your target numbers, you move on—no time wasted.
This step is critical because many new investors get stuck overanalyzing deals without a clear benchmark. Having a defined return goal keeps you focused and ensures you're only pursuing investments that align with your financial objectives.
Learn more about which commercial real estate investment metrics you should be tracking.
Step 2: Understand Key Metrics
To quickly determine whether a commercial real estate deal makes sense, you need to focus on a few essential financial metrics. These numbers help you assess profitability, risk, and long-term viability—all in under five minutes.
Here are the four key metrics every investor should know:
1. Net Operating Income (NOI) – The Foundation of Your Investment
Formula:
NOI = Gross Rental Income − Operating Expenses
NOI is the amount of income a property generates after paying for operating expenses but before making mortgage payments.
For example, if a property generates $1,000,000 in rent and has $400,000 in expenses, the NOI is:
1,000,000 − 400,000 = 600,000
Why It Matters: NOI tells you how much actual income a property produces, which is essential for determining its value and return potential.
2. Capitalization Rate (Cap Rate) – Valuing the Property
Formula:
Cap Rate = NOI ÷ Purchase Price
Cap rate is the return you would earn if you bought the property in cash (without financing).
For example, if you’re buying a property for $6,000,000 and its NOI is $600,000, the cap rate is:
600,000 ÷ 6,000,000 = 10% cap rate
Why It Matters:
A higher cap rate means a higher potential return (but usually comes with higher risk).
A lower cap rate means lower potential return (but usually indicates a more stable, less risky investment).
Investors typically compare cap rates across similar properties in a market to determine if a deal is fairly priced.
3. Debt Service Coverage Ratio (DSCR) – Can You Afford the Loan?
Formula:
DSCR = NOI ÷ Total Debt Payments
DSCR measures a property's ability to cover its loan payments. Lenders typically require a DSCR of 1.25 or higher, meaning the property generates 25% more income than what’s needed to cover its mortgage.
For example:
If your NOI is $25,000 and your annual mortgage payment is $20,000, your DSCR is: 25,000 ÷ 20,000 = 1.25x
Good—this meets lender requirements.
But if your mortgage payment is $30,000, your DSCR would be 0.83, meaning the property doesn’t generate enough income to cover its debt.
Bad—banks won’t finance this deal unless you put in more equity.
Why It Matters: If the DSCR is too low, you’ll struggle to get financing. If it's too high, you might be under-leveraging the property.
4. Cash-on-Cash Return (CoC) – Your Actual Return on Investment
Formula:
CoC= Annual Cash Flow ÷ Initial Cash Investment
Unlike cap rate, which assumes you pay cash for a property, cash-on-cash return measures your actual return based on the money you invest.
For example, if you invest $100,000 into a deal and it produces $20,000 per year in cash flow, your cash-on-cash return is:
20,000 ÷ 100,000 = 20%
Why It Matters:
CoC helps you compare real estate investments to other opportunities like stocks or bonds.
A strong CoC return is usually between 8–12%, depending on the market and property type.
If your CoC is too low, you might be overpaying for the deal.
Step 3: Gather Market Data
Once you understand the key financial metrics (NOI, Cap Rate, DSCR, and Cash-on-Cash Return), the next step is to gather reliable market data to ensure your numbers are accurate.
Unlike residential real estate, where you can easily find comps on Zillow or Redfin, commercial real estate data isn’t always public. Lease rates, vacancy rates, and recent sale prices can be difficult to track down—but without this information, you’re essentially investing blind.
Here’s how to quickly gather the data you need to validate a deal.
1. Rental Rates – How Much Can You Charge for Rent?
Why It Matters: The rent a property can command directly impacts its income (NOI), which in turn affects its value and return potential.
How to Find Rental Rate Data:
Commercial Listing Platforms – Sites like LoopNet, Crexi, and CoStar list properties for lease, which can help you gauge market rents.
Brokerage Reports – Many national brokerage firms (CBRE, JLL, Cushman & Wakefield) publish quarterly market reports detailing average rental rates by asset type and location.
Direct Outreach – Call local brokers, property managers, or landlords to ask about recent lease deals.
Example:
You’re analyzing a 10,000 sq. ft. retail center and estimating a $12 per sq. ft. NNN lease rate.
If market rates for similar properties are $14/sq. ft., your estimate is conservative—good news.
If market rates are $10/sq. ft., your deal might not pencil out.
Pro Tip: Rental rates vary based on location, lease structure (NNN vs. Gross), and property condition, so always compare apples to apples when looking at market comps.
2. Vacancy Rates – How Likely Is It That You’ll Have Empty Space?
Why It Matters: If a property sits vacant, you still owe your mortgage, taxes, and insurance—but with no income coming in. High vacancy rates can kill your returns.
How to Find Vacancy Data:
Brokerage Reports – Look for market vacancy rates by asset class (retail, office, industrial, multifamily).
Local Economic Reports – Cities often publish real estate market trends through economic development agencies.
Survey Listings – If you see tons of similar properties sitting vacant on LoopNet or Crexi, that’s a red flag.
Example:
If the market vacancy rate is 3-5%, demand is strong, and you can expect stable occupancy.
If vacancy is 15% or higher, filling the space may be challenging, leading to lower income and a higher risk of loss.
Pro Tip: Vacancy rates differ by market—a 5% vacancy in a hot industrial market like Nashville is great, but a 15% vacancy in San Francisco’s struggling office sector could be a disaster.
3. Lease Structures – Who Pays for What?
Why It Matters: Commercial leases come in different structures that significantly impact how much net income you actually keep.
Common Lease Types:
Triple Net (NNN) Lease – The tenant pays property taxes, insurance, and maintenance (landlord keeps a higher NOI).
Modified Gross Lease – The landlord and tenant split some expenses.
Full-Service Gross Lease – The landlord pays most expenses (NOI is lower, but lease rates are higher).
Example:
Let’s say two similar buildings rent for $12/sq. ft.
If Building A is leased as NNN, the tenant covers all expenses—your NOI remains strong.
If Building B is a gross lease, you might have to pay $3–$5/sq. ft. in expenses, lowering your NOI and returns.
Pro Tip: Always verify which lease type is being used in your market comps, or you could miscalculate the deal.
4. Recent Sale Prices – What Are Properties Selling For?
Why It Matters: If you overpay for a property, it’s much harder to hit your target returns. Looking at recent sale prices helps determine if you’re getting a fair deal or overpaying.
How to Find Sale Price Data:
CoStar & Crexi – They have commercial sale listings, but some require a paid subscription.
County Property Records – Many counties publish commercial sales data online for free.
Brokers & Appraisers – Local professionals often have access to off-market sales data.
Example:
You’re looking at a 50,000 sq. ft. industrial property priced at $5,000,000 ($100/sq. ft.).
If similar properties recently sold for $120/sq. ft., you might be getting a deal.
If comps are closer to $80/sq. ft., you may be overpaying.
Pro Tip: Some commercial sales aren’t publicly recorded, so talking to brokers and investors in your market is key to getting the real numbers.
5. Market Supply & Demand – Is It a Good Time to Buy?
Why It Matters: Even if a deal looks good on paper, market conditions can determine if it’s actually a smart investment.
What to Look At:
New Construction Pipeline – If a flood of new properties is being built, supply may outpace demand, leading to lower rents.
Business Growth – Are companies expanding and leasing more space, or downsizing and creating vacancies?
Local Economic Trends – Job growth and population trends directly impact real estate demand.
Example:
You’re looking at a flex industrial building in Nashville:
If almost no space is available and demand is rising, rents will likely increase—great news for investors.
If tons of new buildings are coming online, rents might drop due to oversupply.
Pro Tip: Compare supply & demand across different asset classes—a hot market for industrial space doesn’t mean office space is also booming.
Step 4: Plug the Numbers into a Deal Analysis Tool
Now that you've gathered accurate market data—rental rates, vacancy rates, lease structures, and recent sales—it's time to run the numbers and determine whether a deal meets your investment goals.
The easiest way to do this? Use a deal analysis spreadsheet or software that quickly calculates key financial metrics like NOI, cap rate, DSCR, and cash-on-cash return.
Let’s walk through the process step by step.
1. Use a Commercial Deal Analysis Spreadsheet
Instead of manually crunching numbers, a commercial underwriting spreadsheet can do the heavy lifting. These tools allow you to input basic property details and quickly see if the deal works.
What a Deal Analysis Spreadsheet Should Include:
Purchase Price & Closing Costs – The total upfront cost of acquiring the property.
Renovation Budget (if applicable) – Any planned improvements that will impact NOI.
Rental Income – Based on market lease rates and occupancy.
Operating Expenses – Property taxes, insurance, maintenance, utilities, etc.
Financing Details – Loan amount, interest rate, term, and monthly payments.
Key Metrics (Automatic Calculations) – NOI, cap rate, DSCR, and cash-on-cash return.
2. Identify Whether a Deal Works or Not
Now that the numbers are plugged in, you can quickly decide if the deal meets your investment criteria:
If the cap rate is below market averages, the property may be overpriced.
If the DSCR is too low, lenders may not approve financing.
If the cash-on-cash return is low, your money might be better invested elsewhere.
In our example, the deal fails two key tests (DSCR and cash-on-cash return), which means it likely isn't a great investment unless adjustments are made.
Solution?
Negotiate a lower purchase price.
Increase rents (if possible).
Reduce expenses.
Consider different financing options.
Pro Tip: Underwrite at least one deal per day for 30 days—whether you plan to buy or not. The more reps you get, the faster you’ll recognize a good deal when it comes along.
3. Download My Deal Analysis Toolkit (Free Resource)
If you’re serious about analyzing commercial real estate deals, you need a solid underwriting template.
This toolkit includes:
A Commercial Underwriting Spreadsheet – Just plug in the numbers and get instant calculations.
Checklists for Due Diligence, Value-Add Strategies, & Closing Costs
A Commercial Rent Roll Template – Track tenant lease data efficiently.
Having the right tools in your arsenal can save you hours and help you make smarter, faster investment decisions.
Mastering Deal Analysis
Running the numbers on a commercial real estate deal doesn’t have to be complicated—especially when you have the right tools.
By following this process, you can analyze any deal in under 5 minutes and immediately tell whether it’s worth pursuing.
If the numbers work: Move forward with deeper due diligence.
If the numbers don’t work: Move on—there’s always another deal!
Next Step: Now that you know how to analyze deals, check out this in-depth case study below to see these principles in action!
Commercial real estate numbers can feel complex. Cap rates, net operating income (NOI), debt service coverage ratios—it’s a lot to digest. But the good news? You don’t need a finance degree to run the numbers like a pro.