How to Analyze a Commercial Property

[James Lucenti]

1. Net Operating Income (NOI)

Definition: NOI is the total income a property generates after operating expenses, but before mortgage payments. Income includes gross rent plus any additional income (laundry, parking, charging stations, billboards, etc). This is your Gross Operating Income (GOI). Expenses include things like management fees, routine maintenance , insurance, property taxes, utilities (if paid by property owner), legal/accounting, and vacancy. Note - Vacancy is typically deducted off the GOI prior to calculating other percentage charges like vacancy and management. 

Formula:
NOI = Gross Operating Income – Operating Expenses

Example:
Let’s say you’re looking at a small retail plaza:

• Gross Rental Income: $120,000/year

• Vacancy & Credit Loss: $6,000

• Operating Expenses (repairs, insurance, management, etc.): $40,000

NOI = ($120,000 - $6,000) - $40,000 = $74,000

2. Capitalization Rate (Cap Rate)

Definition: Cap Rate tells you the property’s return if you bought it in cash. It’s a good way to compare properties.

Formula:
Cap Rate = NOI ÷ Purchase Price

Example:
If that same property with $74,000 in NOI is listed for $925,000:

Cap Rate = $74,000 ÷ $925,000 = 0.08 or 8%

A higher cap rate typically means more risk and more return; lower cap rate = more stability, less risk.

3. Debt Service Coverage Ratio (DSCR)

Definition:
DSCR measures a property's ability to cover its debt payments with its net income.

Formula:
DSCR = NOI ÷ Annual Debt Service (mortgage payments)

Example:
Let’s say your loan payments (principal + interest) total $60,000/year.

DSCR = $74,000 ÷ $60,000 = 1.23

A DSCR above 1.2 is generally considered healthy by lenders. Anything under 1.0 means the property isn’t generating enough income to cover the loan.

4. Cash-on-Cash Return

Definition: This metric shows the return on your actual cash invested, not the whole property price.

Formula:
Cash-on-Cash Return = (Annual Cash Flow ÷ Initial Cash Investment) × 100

Example:
Let’s say you put down 25% on a $925,000 property = $231,250
After paying mortgage, you’re left with $14,000/year in cash flow.

Cash-on-Cash Return = ($14,000 ÷ $231,250) × 100 = 6.05%

Quick Recap

Metric	What It Tells You	Good Starting Target
NOI	Profit before debt	Higher is better
Cap Rate	Return if bought in cash	6–10% (varies by market)
DSCR	Ability to cover debt	1.2 or higher
Cash-on-Cash	Return on your cash	6–12% depending on risk tolerance

Final Thoughts

Start by running these calculations on every deal you look at. Even if the deal doesn’t work, each analysis builds your muscle memory and helps you better understand the market. Remember: it’s not just about buying real estate—it’s about buying good deals. 

Pro Tip: Use a simple spreadsheet or online calculator to plug in your numbers quickly. As you gain experience, you'll be able to evaluate deals in minutes. Also if you are new to a market connect with a CRE broker who is familiar with the area to determine the market vacancy rate, average cap rate and average management fees for the property type you are looking for.