How to Analyze a Commercial Real Estate Deal Before You Commit

Analyzing a commercial real estate deal isn't about gut feel — it's about a handful of key metrics that tell you whether the income supports the debt and whether the price makes sense. Here's the framework we use.

Start with NOI

Net operating income is the foundation of every commercial deal metric. It's gross rental income minus operating expenses — property taxes, insurance, maintenance, management, and utilities — but before debt service and depreciation. If your NOI is wrong, every number you derive from it is wrong too. Get the rent roll and the T-12 (trailing 12-month operating statement) and verify them.

Cap rate

Cap rate is NOI divided by purchase price. It's a quick measure of return if you paid all cash. A 7% cap rate means the property generates 7% of the purchase price in annual NOI. Cap rates vary by asset type, location, and market conditions — the question isn't just 'is it a good cap rate?' but 'is it a good cap rate for this asset in this market?'

Debt yield

Debt yield is NOI divided by the loan amount — it tells the lender (and you) whether the property's income can cover the debt regardless of interest rate or amortization. Most commercial lenders want a debt yield of 10% or higher. If your debt yield is 8%, you may not get the leverage you're modeling. Know this before you submit.

DSCR and cash flow after debt service

DSCR is NOI divided by annual debt service. A 1.25 DSCR means the property's income covers the debt payment by 25%. Most lenders require 1.20–1.35 depending on asset type. If your DSCR is below the lender's minimum, the loan amount gets cut — which means more equity, which changes the whole return profile.

The whole picture

No single metric tells you whether to do a deal. Cap rate tells you about price. Debt yield tells you about leverage. DSCR tells you about the loan. Cash-on-cash return tells you about your actual equity return. IRR tells you about the time value. You need all of them — and you need them before you write an offer, not after.

This is exactly what HLD does when we package a commercial deal: we run the numbers, verify the rent roll and T-12, model the debt, and check every metric against what the lender will require. You walk in knowing your max leverage, your minimum DSCR, and your real cash-on-cash return — before you commit a dollar.