How To Evaluate Commercial Real Estate Properties

Purchasing commercial real estate can help you build a profitable portfolio faster than buying residential buildings. To make good decisions regarding what to purchase, you must thoroughly evaluate the properties. There are many aspects to examine before you begin a deal.


The set of comparisons real estate professionals use to appraise properties are not based only on the sales price like residential real estate. Commercial sites are specialized listings that require in-depth analysis to determine the value of the investment. Comps refer to properties that are alike in value and features. Inspecting real estate comps requires many types of data. This process determines the value of the property and helps you identify additional opportunities.

Some of the essential valuation areas to examine include:

  • Capitalization rate: Real estate agents divide the sales price by the net operating income to find the cap rate. This rate helps evaluate what your return would be if you paid cash for the real estate purchase. Comparing this rate to the cap rate of other properties helps identify lucrative investments.
  • Cash flow: This term refers to the amount of capital you will have after paying your mortgages and expenses. It is a crucial valuation point to consider before you buy a property.
  • Net operating income: The NOI is the money that the property brings in after paying the operational costs. The cap rate is determined using this value.
  • Gross income: This is the revenue amount before factoring in any monetary obligations.
  • Cash-on-cash return: This number results from dividing the cash you put down by the annual income it generates.

Other Considerations

In addition to the monetary evaluations, you need to consider some of the following factors:

  • Can you obtain financing for the commercial real estate property?
  • What paperwork do you need to see? You may need to ask for documentation showing the rent roll of current tenants, expense statements, income statements, copies of leases and more.
  • What assistance does a commercial broker provide? Commercial deals are different from residential deals and require experienced professionals to handle the various aspects.
  • How much cash do you need to prepare for unexpected expenses? You may not foresee some costs. You need to plan, so you have the money to cover them.

Type of Commercial Properties

The kind of real estate you purchase makes a difference during the evaluation process. There are varying elements to address depending on the investment you make. Some commercial opportunities include:

  • Industrial properties
  • Multifamily units
  • Office and retail buildings

There are many specialized components of a commercial real estate deal. Evaluate the many aspects of your purchase and consult with an experienced commercial agent to make informed decisions regarding your investments.