Most commercial investment real estate purchasers aren’t looking to use the real estate on its own merits. They’re looking to make money off of it. With this in mind, the tools of commercial real estate financial analysis focus much more on the property’s income and expenses than on the property itself.

To financially analyze a property, you need to know what it is producing. The most popular financial analysis metric, the capitalization rate, gets calculated based on a property’s Net Operating Income. NOI starts with a property’s annual income. The property’s scheduled gross income is the sum of its rental collections, uncollected scheduled rent and its other income. To calculate the effective gross income, subtract a vacancy favor from the SGI.

NOIs track income after operating expenses. Operating expenses are all of the annual recurring expenses that you pay for the property, other than debt service. They include landlord-paid utilities, management, property taxes, and maintenance and repairs. Subtract the operating expenses from the EGI to find the NOI. You can use the income and the NOI to calculate metrics like the gross rent multiplier, the cap rate or, with information about loans, the cash-on-cash return.

Assuming that the information that goes into them is accurate, NOIs don’t lie. But they don’t tell the whole truth either. Which building would you rather buy?

  1. A $2,000,000 building with a $180,000 NOI paid by two tenants, both of which are in good financial shape and have at least 5 years left on their leases.
  2. A $2,000,000 building with a $185,000 NOI paid by one tenant who is shaky and has 18 months left on its lease.

When you look exclusively at the NOI, the second building is the better deal, since you get a higher cash flow. To be exact, it offers a 9.25 percent return, or cap rate, as opposed to the 9.0 percent cap rate that the first building offers. However, the first building probably has much better long-term prospects since the tenants are likely to stay for a longer period of time.

When you financially analyze a property, keep this in mind. A financial analysis can tell you what a building is producing. It can tell you how a building compares to other buildings. It can help you figure out if it makes good financial sense to use a loan to buy a property. But it can’t tell you exactly how a building will perform after the date of the analysis. You will need to use your judgment and experience to make a prediction. Financial analysis and modeling tools can help you quantify the results of those predictions, but you’ll still need to make the call.

Ultimately all CRE investment clients have one simple question about hiring you. Will this broker provide me the opportunity to make more money?

If you are interested in only speaking with qualified prospects, and no longer wasting your time chasing those who will never make a decision or those that do not value your time, click below for our free download!

Recent Posts

The 5 Pillars to Grow a Great CRE Business

When I was running my own commercial real estate firm, I was busy. I would characterize most days as chaotic. Even when I did have a plan for the day, distractions, interruptions, and opportunities would appear from nowhere and knock me off course. I had bought into...

A Simple Yet Powerful CRE Marketing Tool

The following blog post is from HBS Resources President and Massimo Group coach, Blaine Strickland. I am thrilled to share that Blaine has just launched his first book, Thrive: Ten Prescriptions for Exceptional Performance as a Commercial Real Estate Agent. In today’s...

How to Find Your Specialty with 3 Questions

I am continually surprised by Commercial Real Estate brokers who lack a specialty. All top performers in CRE have a specialty. Yet, those mired in mediocrity refuse to hone in on what they can be awesome at doing. In fact, business owners of all kinds often have this...

4 Ways To Make Telephone Prospecting Easy

I once worked with a commercial real estate brokerage manager who said there were two types of people in the world – those that didn’t like to cold call, and those that lie about liking cold calling. He might have overstated his point a bit, but he does have a point....

Here’s My Weekly Plan for Maximum Results

With our coaching clients, we implement a productivity program - appropriately termed I.P.A.I.D.™. This process allows them to look back at every day and answer “yes” to the question: “Was I paid today?” I also use this approach in planning for my week. Every Sunday...