The 7-Point Commercial Deal Screen

Most investors open a commercial deal and feel one of two things: I think this is good — but I don't actually know, or the model gets bigger than their confidence and they close the tab.

Neither is a real answer. And "is this a good deal?" is the wrong question. The right move is to stop asking and start knowing — and you can get 80% of the way there in about ten minutes, before you spend a single hour on a full underwrite.

These are the seven things I look at first when a commercial deal hits my desk. If a deal fails three or more of them, I'm out — I don't waste another minute. If it passes, then it earns the deep work. Pull up the listing and the seller's numbers and run them in order.

Cap rate vs. the submarket — is it priced right, or priced like a fantasy?

What to look atTake the property's real net operating income (NOI = all income minus all operating expenses, before the mortgage) and divide it by the asking price. That's the cap rate. Then compare it to what similar buildings in that exact submarket are actually trading at.

Green: Cap rate at or above the submarket average — roughly 5.5%+ on a stabilized deal in a normal market.

Yellow: 4%–5.5%. Tight. The price is leaning on future growth, not today's income.

Red: Below the submarket comp set with no story for why. You're overpaying for someone else's optimism.

Why it matters: Cap rate is the deal's price tag in plain English. A cap rate well below the submarket means you're paying a premium the income doesn't justify — and you'll feel it the day you try to sell.

DSCR — will the building pay its own mortgage?

What to look atDebt-Service Coverage Ratio = NOI ÷ annual debt service (the full mortgage payment for the year). It answers the only question the bank actually cares about: does the property's income cover the loan?

Green: 1.25x or higher. The building throws off $1.25 for every $1.00 of debt — real breathing room.

Yellow: 1.15x–1.25x. Most lenders won't fund below ~1.15x, so you're at the floor with no cushion.

Red: Below 1.15x. The deal doesn't cover its own debt. You'd be feeding it out of pocket from day one.

Why it matters: This is the whole game. In commercial, the bank evaluates the asset, not you — and DSCR is how it does it. A deal that clears 1.25x qualifies on its own income, no matter what your credit score says.

T-12 actuals vs. the proforma — are you buying reality or a brochure?

What to look atGet the trailing-twelve-months (T-12) actual operating statement and lay it next to the broker's proforma. Compare line by line: actual income vs. projected income, actual expenses vs. projected expenses.

Green: Proforma is within ~5–10% of the T-12 actuals, and every increase has a named reason (signed lease, completed renovation).

Yellow: Proforma assumes a 10–20% jump with only vague "upside" to explain it.

Red: Proforma income is far above actuals, or expenses are conveniently lower than what the building really spent. That's a pitch, not a deal.

Why it matters: Brokers sell the proforma — the dream version. You're buying the T-12 — the real version. The gap between them is exactly where investors overpay. Underwrite the actuals and treat every proforma promise as something you have to earn, not something you're handed.

Rent-to-market gap — is there real upside, or is it already maxed out?

What to look atCompare in-place rents to true market rents for that submarket and unit type. The gap tells you whether there's room to raise income — and how much risk you're taking to get it.

Green: In-place rents sit 5–15% below market. Believable upside you can capture as leases roll.

Yellow: Already at market. Fine — but you're paying for what is, with no margin to create value.

Red: In-place rents are above market, or the only way the deal works is a 25%+ rent jump on day one. That's not upside; that's a prayer.

Why it matters: The safest money in commercial real estate is closing a believable rent gap. A small, provable gap is the cleanest path to forced value. A gap you have to invent is how good-looking deals quietly lose money.

Expense ratio sanity — do the operating costs even make sense?

What to look atDivide total operating expenses by gross income. That's the expense ratio. Compare it to what a building like this actually costs to run — taxes, insurance, management, maintenance, utilities, vacancy.

Green: Operating expenses are under ~60% of gross income (varies by asset type and whether utilities are owner-paid).

Yellow: 60–75%. Either it's an expense-heavy asset or the seller is running it lean — pressure-test it.

Red: Under ~35–40%. That almost always means real costs are missing — they "forgot" property taxes after reassessment, management, or a true maintenance reserve.

Why it matters: A suspiciously low expense ratio is the most common way a proforma lies. When expenses are understated, NOI is overstated, the cap rate looks better than it is, and you overpay. Sane expenses are the difference between the deal you think you're buying and the one you actually own.

Exit / refi assumptions — does the plan survive a higher cap rate?

What to look atFind the exit cap rate the deal assumes when you sell or refinance. The honest move is to assume you exit at a higher cap rate than you bought at (cap rates tend to drift up over a hold), and check whether the returns still hold.

Green: Exit cap is set 0.5–1.0% higher than the going-in cap, and the deal still works.

Yellow: Exit cap equals the entry cap — optimistic, leaning on the market staying perfect.

Red: Exit cap is lower than entry (assuming you sell at a richer price than you bought), or the whole return depends on a refi at numbers no lender has promised.

Why it matters: Most of the return in a lot of commercial deals is hiding in the exit assumption. Shave the exit optimism and you find out fast whether you're buying real cashflow or a bet on the market. Cap-rate expansion is what wipes out investors who only modeled the upside.

Break-even occupancy — how much can go wrong before you bleed?

What to look atCalculate the occupancy level where the building's income exactly covers all expenses plus the mortgage — the break-even point. Then measure the buffer between that and the occupancy you're actually underwriting.

Green: Break-even sits 15+ points below your underwritten occupancy. (Underwrite 90%, break even at 75% — that's a real cushion.)

Yellow: 8–15 point buffer. Thin. A soft year and you're at the line.

Red: Under an 8-point buffer, or break-even occupancy above ~90%. One bad quarter and the deal goes negative.

Why it matters: Everything above tells you what the deal does when it goes right. This tells you what happens when it goes wrong — and deals are won or lost on the downside. A fat break-even buffer is what lets you sleep at night when the market doesn't cooperate.

How to score it

Give each check a green = 2, yellow = 1, red = 0. Add them up out of 14.

11–14Strong. Worth a full underwrite. Bring it to a deal review.

8–10Acceptable. Real, but the price or the assumptions need work. Negotiate.

5–7Marginal. Only if you can fix what's broken on terms.

< 5Needs work. Pass, and don't look back. You just saved yourself a week.

The part most people get backwards: "Is this a good deal?" is a feeling. The seven checks are an answer. The investors who break through the residential ceiling aren't smarter than you and they don't have better instincts — they have a system that turns a deal into seven numbers and a verdict. Run these seven, and you'll already be ahead of most people staring at the same listing.

Want to stop screening and start knowing — on your real deals?

This is the fast filter — the first ten minutes. The full system is where you take a deal that passed the screen and underwrite it to the dollar, then bring it to a live review and have it ripped apart with you until you can read a 60-unit the way you read a duplex. That's Underwriting Mastery, one of three pillars inside the Cashflow Code.

If you own a couple of rentals, you're done "researching," and you want to place your first commercial offer in the next 30 days:

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