01
Investing
The possibility has to survive the numbers.
A commercial investment may create value through cash flow, lease structure, basis, future use, repositioning, or a combination. It still has to survive the NOI, financing, tenant and lease risk, capital requirements, and exit assumptions.
02
Debt and coverage
03
Tenant and lease risk
04
Capital and exit
How I Underwrite
What kills the deal gets named first.
- Trailing numbers over pro forma. I start from the last twelve months of actual income and expenses. Projections get tested.
- Conservative expenses. Reserves, management, and vacancy go in even when the seller's statement leaves them out.
- Verified or inferred. Every input is labeled by where it came from, so you know which numbers are facts and which are estimates.
- Land at market value. Yield on cost includes the land at today's market value.
- Risk before upside. Entitlement, absorption, infrastructure cost, and timeline risk come before the upside case.
Common Questions
How do I know whether a commercial property is a good investment?
Start with actual net operating income from the trailing twelve months. Then test the basis, cap rate, debt service, DSCR, debt yield, tenant and lease risk, capital requirements, future possibilities, and realistic exit assumptions. The decision rests on what the property can support.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures a property's net operating income against its purchase price before financing. Cash-on-cash return measures annual cash flow against the equity invested after financing. Both are useful, and neither should be viewed without considering debt, future capital needs, lease risk, and the exit strategy.
How should financing affect the investment decision?
Financing can improve an equity return, but it also increases fixed obligations and downside exposure. The analysis should test the payment, DSCR, debt yield, interest-rate risk, maturity date, reserves, and the property's ability to carry the debt under conservative assumptions.
What tenant and lease risks should I evaluate?
The tenant's credit, remaining lease term, rent relative to market, renewal options, expense responsibilities, rollover timing, and the cost of replacing the tenant all affect value. A strong current rent does not eliminate lease or vacancy risk.
How much capital should I expect to need beyond the purchase price?
The equity requirement may include the down payment, closing costs, lender reserves, immediate repairs, tenant improvements, leasing commissions, operating reserves, and future capital expenditures. Evaluate the investment against the full capital requirement.
Can a self-directed Roth IRA invest in commercial real estate?
IRA rules do not generally prohibit real estate as an investment, but not every custodian permits it. A self-directed IRA requires a custodian that allows alternative assets, and strict prohibited-transaction rules apply. I can help evaluate the property itself. The custodian and qualified tax and legal advisors should handle account structure and compliance.
Can you help me identify a 1031 replacement property?
Yes. I can help define the acquisition criteria, identify potential replacement properties, and evaluate whether the income, basis, financing, lease risk, future potential, and long-term strategy fit the objective. Coordinate the exchange structure and deadlines with a qualified intermediary and tax and legal advisors.
What should the exit strategy look like before I buy?
The exit should be considered before the acquisition. Hold period, future buyer pool, lease rollover, debt maturity, capital needs, market rent, alternative uses, and the property's future positioning all affect how easily the investment can be refinanced, improved, repositioned, or sold.
If you are evaluating a commercial investment property, begin with the opportunity, then test the numbers and the downside.
Brian Orr provides commercial real estate brokerage and property analysis. He does not provide tax, legal, securities, or retirement-account advice. Consult qualified advisors before using an IRA or completing a 1031 exchange.
From the Knowledge Center