How to Underwrite a Commercial Real Estate Deal, Step by Step

Before you request financials or schedule a tour, do a quick sanity check with whatever's in the listing: - Price per unit / per square foot: How does it compare to recent comparable sales in the same submarket? Wildly above comps needs a strong justification (value-add upside, irreplaceable location); wildly below comps is often a red flag (deferred maintenance, legal issues, distressed seller). - Implied cap rate at asking price: If the listing states an NOI, does the resulting cap rate look plausible for this property type and market tier? (See our Cap Rate Benchmarks Guide for typical ranges.) If it clears this quick screen, move forward. If not, don't waste time requesting a full financial package on a deal that's obviously mispriced.

Ask the seller/broker for a trailing-12 (T-12) income statement, current rent roll, and (ideally) 2-3 years of historical operating statements. Then don't just accept the bottom-line NOI — reconstruct it using the method in our How to Estimate NOI guide, normalizing for owner add-backs, below-market management fees, and any gaps between the rent roll and actual collections.

With a defensible NOI in hand, run the numbers that actually drive your decision: - Cap Rate: Does the going-in yield make sense for this asset class and market tier? - Cash-on-Cash Return: What's your actual return on the cash you're putting in, factoring in your realistic financing terms? - DSCR: Will a lender's minimum threshold (typically 1.20–1.25) actually be met at your target loan amount — or does this deal only work with an unrealistically small loan? - Break-Even Ratio: How much cushion do you have before vacancy or rising expenses put you underwater? If any of these come back thin, that's not automatically a dealbreaker — but it tells you exactly where your risk is concentrated and what needs to improve (price, financing terms, or operational upside) for the deal to work.

Run your key ratios again under a less favorable scenario — vacancy up 3-5 points from your base case, a modest increase in operating expenses, and (if you're not locking a fixed rate) an interest rate 50-100 bps higher than today's quote. If the deal still pencils reasonably under a stress case, that's a much stronger signal than a deal that only works if everything goes exactly as planned.

Numbers alone don't close a deal safely — verify the physical and legal condition of the asset: - Property condition assessment: A professional inspection covering roof, HVAC, structural, and major systems — budget for anything flagged as near end-of-life. - Title review: Confirm there are no liens, easements, or title defects that could complicate closing or future resale. - Environmental review (Phase I ESA): Particularly important for industrial and older commercial properties with any history of fuel storage, dry cleaning, or manufacturing use. - Zoning and permit compliance: Confirm the current use is legally permitted and that any planned renovations or expansions are actually allowed under current zoning. - Lease abstract review: For multi-tenant properties, actually read (or have your attorney read) the underlying leases — don't rely on a summary rent roll alone, which can miss early termination rights, below-market renewal options, or tenant-favorable co-tenancy clauses.

Get an actual term sheet from a lender (not just a rough rate quote) before you're too far into the process — the specific DSCR, loan-to-value, and amortization terms you actually qualify for can meaningfully change your Cash-on-Cash and Break-Even numbers from Step 3.

Bring it all together: does the risk-adjusted return justify the price, given what you found in due diligence and the realistic financing you can actually secure? A deal that looked good on the initial screen but reveals meaningful issues in diligence should be repriced (renegotiate) or walked away from — not forced through because you've already invested time in it.