05/29/2026
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Before you make an offer on any commercial property, there are three numbers you need to calculate.
Not estimate. Not guess. Calculate.
Because if even one of these numbers is wrong, you could overpay by hundreds of thousands of dollars. Or worse, buy a property that drains cash every single month.
Here are the three numbers.
First: Net Operating Income.
This is your actual income after you pay all the operating expenses, but before you pay the mortgage or taxes.
If the NOI is inflated, or if it's based on projected rents instead of actual rents, you're making an offer on fantasy numbers.
Always verify NOI with real financials. Actual rent rolls. Actual expense reports. Tax bills. Bank statements if you can get them.
Do not trust pro forma projections without backing them up with real data.
Second: Cap Rate.
Once you know the real NOI, calculate the cap rate. NOI divided by purchase price.
Then compare that cap rate to other similar properties in the same market.
If the seller is asking for a 5% cap rate but comparable buildings are trading at 7%, you need to understand why.
Is this property actually better? Or is the seller just overpricing it and hoping you don't check?
Third: Debt Service Coverage Ratio.
This tells you if the property can actually cover its own mortgage.
Take your NOI. Divide it by your annual loan payment.
You want 1.25 or higher. That means the property generates 25% more income than it needs to pay the mortgage. That's your safety margin.
If the DSCR is below 1.25, most lenders won't even finance the deal. And if it's below 1.0, the property literally cannot pay for itself.
You'd be writing checks out of your own pocket every month just to keep the lights on.
Before you make an offer, calculate all three: NOI, cap rate, and DSCR.
And if the numbers don't work, walk away.
No matter how much you like the property. No matter how good the location is. No matter what the seller tells you about future potential.
The numbers either work or they don't.
And in commercial real estate, emotions don't pay the mortgage.
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