Commercial Real Estate Broker Analysis

picture of spreadsheet and calculator - property analyzation by commercial real estate broker

5 Steps for Property Analysis from a Commercial Real Estate Broker


Whether you are a first-time commercial real estate investor, representing an institution, or have personally built up a substantial commercial property portfolio, completing a commercial property analysis still remains a necessary step before any transaction. There are complex analyses that can be done on the property, the market, the industry, and more. But the following 5 considerations are metrics that your commercial real estate broker can help with for each deal under consideration. 

These basic financial equations will allow an investor to quickly scrutinize the viability of a property and compare to others under consideration. 


5 Key Elements of Commercial Property Analysis

  1. Income and Expenses
  2. Net Operating Income (NOI)
  3. Cash Flow
  4. Cash on Cash Return
  5. Capitalization Rate (CAP Rate)

If new to commercial real estate investing, you may have heard these terms, but may be unable to explain the difference between each one. Thankfully, they are simpler than you might expect. 

It is helpful to understand these 5 foundational financial analyses and how to quickly apply them to the subject property even if you are being represented by a commercial real estate broker in Colorado Springs. 


1. Income and Expenses

To prepare an initial property analysis, it’s important to start by looking at the income and expenses of the property. This should be available from the seller or listing broker. This Income Expense Statement will provide exactly what it says – both the income and expenses of the property. Be sure to peruse the document with a keen eye, as there can be discrepancies in the numbers from a negligent or disorganized owner.

Income is all the money that is produced from the property – the revenue. This would include rent collected, late fees, laundry fees, etc. 

Expenses include anything incurred to operate the property (operational expenses), such as utilities, property management, lawn maintenance, taxes and so on. An important note about expenses is that the loan payment (or any other debt expense) is not considered part of the operational expenses. It will be excluded from figures for this section. 

For your factors – What are you looking for in this item?

This one barely needs stating. You want the income on the commercial property to be greater than the expenses.  

Benchmark: Income > Expenses


2. Net Operating Income (NOI) 

Just as you would expect, this factor equals the property’s income minus expenses. Keep in mind, the NOI does not include any loan expenses either. This is perhaps one of the most practical and important factors to consider when looking at commercial real estate. 

As your NOI goes up, the cash flow and consequent value of the property goes up. Conversely, when it goes down, so follows the cash flow and property value. 

For your factors – What are you looking for in this item?

While you derive this factor from income minus expenses, what you want to see is the net operating income being greater than your loan payment. This will play directly into your cash flow (the next factor we will discuss). 

Benchmark: NOI > Loan Payment



3. Cash Flow

In simple terms, the cash flow is the money the investor retains every month. Cash flow equals NOI minus the loan payment – this is the monthly profit.

For your factors – What are you looking for in this item?

Different investors have different cash flow requirements depending on their goals. An owner-user who is occupying a portion of the property may just want to cover some of their own monthly expenses. Institutional funds often have specific targets they are trying to meet to satisfy their investors. A small investor can do vacancy “stress tests” to see what would happen if they experienced vacancies and determine what their cash flow requirements should be to cover such an event. 

Benchmark: Positive Cash Flow 


4. Cash-on-Cash Return

Cash-on-cash return considers the profit in relation to the amount of cash put into the investment. Cash-on-cash return measures the amount of cash returned over a one year period compared to the amount of money initially invested. In other words, how fast the money is moving. As an investor, the rate of return on invested capital is an important factor.  

This figure is derived from the annual cash flow divided by the initial cash investment. Cash flow / Down Payment (x 100 for percentage)

If a commercial real estate investor’s cash is returned in one year, the cash-on-cash return is 100%. 

For your factors – What are you looking for in this item?

To get a specific target percentage for an intended property, speak with a qualified commercial real estate broker; however, a general rule of thumb for cash-on-cash return is between 8-10%. 

Benchmark: Cash on Cash Return > 8%



5. Capitalization Rate (CAP Rate)

Capitalization rate is another predictive measurement for the return on investment that the subject property can produce. A CAP rate analysis provides a quick and easy benchmark for comparing various properties. This is factored by dividing the NOI by the sales price of the property. 

Another way of looking at it is if an investor were to pay cash for the property, what would be the return on investment? 

Investors seeking a higher cap rate will usually have to buy more distressed, vacant properties and seek to add value over time through physical improvements and tenant acquisition. Well-established, stabilized properties will generally sell for a lower cap rate, but less necessary time and capital to produce cash flow.

Properties with a lower cap rate often have a lower return but lower risk. While these properties tend to be more costly initially, they may provide a more steady and quality tenant base and fewer property management related issues. Many distressed properties end up being more costly in the long-run through unforeseen improvement costs or extended vacancies. 

For your factors – What are you looking for in this item?

Many small investors target a CAP rate of 7-8% within the first couple of years. Institutional investors will often target lower CAP rates and seek more stabilized properties with long-term, national tenants. CAP rates can vary from city to city, from year to year, and even between different property types.

Benchmark: CAP Rate > 6-8%


Example of Commercial Property Analysis with These 5 Key Factors

Let’s take a look at these numbers in a proposed property purchase. 

Property Price: $850,000
Down Payment (20%): $180,000
Loan Payments: $40,000 per year
Revenue: $96,000 a year
Expenses: $28,000 a year

NOI = Revenue – Expenses
$96,000 – $28,000 = $68,000 NOI

Cash Flow = NOI – mortgage payments
$68,000 – $40,000 = $28,000 Cash Flow

Cash-on-cash return = Cash flow / Down payment
$28,000 / $180,000 = 15.5% COC

CAP Rate = NOI / Price of property
$68,000 / $850,000 = 8% CAP


Partnering with a Commercial Real Estate Broker

Understanding these 5 metrics is a good start toward analyzing and comparing potential commercial property investments. However, they are only the beginning and many of the numbers are subject to interpretation and manipulation. Experienced commercial real estate brokers are skilled at analyzing investments and scrutinizing properties in great detail. Make sure you are partnering with an experienced broker to perform an extensive property valuation for each investment as you begin to build your portfolio. 

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