Commercial Real Estate Underwriting Calculator — Cap Rate, Cash-on-Cash, DSCR & IRR

How to Use the CRE Underwriting Calculator

1. Enter the purchase price and estimated closing costs for the property.
2. Input the gross scheduled rent (total annual rents at 100% occupancy) and your assumed vacancy rate.
3. Enter operating expenses — either a dollar amount or as a percentage of gross income using the toggle.
4. Set your financing terms: loan-to-value (or loan amount), interest rate, and amortization period.
5. Define your exit assumptions: annual rent growth, hold period, and exit cap rate.
6. All results update instantly — review Cap Rate, DSCR, Cash-on-Cash, IRR, and the proforma table.
7. Click Export CSV to download the proforma for use in Excel or Google Sheets.

Understanding Commercial Real Estate Metrics

Commercial real estate underwriting is the process of analyzing a property's income, expenses, financing, and projected returns before making an investment decision. Unlike residential real estate — where comparable sales dominate valuation — commercial property value is primarily driven by the income it generates. This means understanding the following metrics is essential for every CRE deal.

Net Operating Income (NOI) is the foundation of any CRE analysis. It equals effective gross income (gross rents minus vacancy) minus all operating expenses — but crucially, before debt service (mortgage payments). NOI reflects the property's earning power independent of how it is financed, which is why lenders and appraisers use it as the primary valuation anchor.

Cap Rate (Capitalization Rate) is NOI divided by the purchase price, expressed as a percentage. A $1,000,000 property producing $70,000 in NOI has a 7% cap rate. Cap rates move inversely to property values: as investor demand pushes prices up, cap rates compress. As a rule of thumb, lower cap rates indicate stronger demand and/or lower perceived risk. Cap rates vary widely by market, property type, and quality — prime multifamily in gateway cities may trade below 4%, while secondary-market retail may exceed 8%.

DSCR (Debt Service Coverage Ratio) measures how well the property's NOI covers the annual mortgage payment. DSCR = NOI / Annual Debt Service. Most commercial lenders require a minimum DSCR of 1.20 to 1.25, meaning NOI must exceed debt service by at least 20–25%. A DSCR below 1.0 means the property does not generate enough income to cover the mortgage — a red flag for both lenders and equity investors.

Cash-on-Cash Return measures the pre-tax cash yield on your actual equity investment. Unlike cap rate, it accounts for financing: Cash-on-Cash = (NOI − Debt Service) / Cash Invested. A property with a 7% cap rate might deliver a 10% cash-on-cash if leveraged well, or 4% if over-leveraged. This is the metric most equity investors focus on for ongoing yield.

GRM (Gross Rent Multiplier) is a quick shorthand ratio: Purchase Price / Gross Rents. It ignores expenses and vacancies, so it is best used only as a fast first-pass screen to compare similar properties, not as a stand-alone valuation tool.

Break-Even Occupancy shows the minimum occupancy required for the property to cover all operating expenses and debt service. It is calculated as (Expenses + Debt Service) / Gross Potential Rent. If break-even occupancy is 85%, the property can withstand up to 15% vacancy before going cash-flow negative — useful for stress-testing deals in soft rental markets.

IRR (Internal Rate of Return) and Equity Multiple are the primary hold-period return metrics. IRR is the discount rate at which the present value of all cash flows (including the exit proceeds) equals your initial investment — it accounts for the time value of money and is the most common metric for comparing investments with different hold periods. Equity Multiple is simpler: it is the total dollars returned divided by the dollars invested. A 1.8x equity multiple means you get back $1.80 for every $1 invested. Both metrics require an exit assumption — the projected sale price at the end of the hold period, typically based on an exit cap rate applied to the final year's NOI.

Frequently Asked Questions

• What is a good cap rate for commercial real estate?
  There is no universally "good" cap rate — it depends heavily on market, property type, age, and condition. In top-tier urban multifamily markets, cap rates of 3.5–5% are common. In secondary markets or for riskier asset classes (older retail, self-storage), 6–9%+ is typical. Lower cap rates mean higher prices relative to income; higher cap rates mean more yield but often more risk or lower growth potential. Compare cap rates to similar properties in the same submarket and to current interest rates (when cap rates are below borrowing rates, the deal may be negatively leveraged).
• What DSCR do lenders require?
  Most commercial lenders — including banks, credit unions, and SBA-backed lenders — require a minimum DSCR of 1.20 to 1.25. Some agency programs (Fannie Mae, Freddie Mac multifamily) may allow 1.15–1.20. Bridge lenders may underwrite to 1.0 or even below if there is a compelling value-add business plan. A DSCR of 1.25 means for every $1.00 of mortgage payment, the property generates $1.25 in NOI — providing a 25% cushion against income declines.
• What operating expenses should I include?
  Operating expenses typically include property taxes, insurance, property management fees (usually 8–10% of collected rent), maintenance and repairs, utilities (for landlord-paid units), landscaping, and capital reserves/replacement reserves. Debt service (mortgage payments) is NOT an operating expense — it is handled separately. A common rule of thumb is a 35–50% expense ratio for multifamily; retail and office often run higher depending on the lease structure (NNN vs. gross leases).
• How is the exit/sale price calculated?
  This calculator projects sale price by dividing the final year's NOI by your assumed exit cap rate: Sale Price = Final Year NOI / Exit Cap Rate. If you assume the same cap rate as your purchase (i.e., the market doesn't change), value growth comes entirely from NOI growth driven by rent increases. If exit cap rates expand (cap rates rise), your sale price will be lower than expected — one of the biggest risks in CRE investing. Sensitivity testing different exit cap rates is a critical part of rigorous underwriting.
• What is the difference between IRR and cash-on-cash?
  Cash-on-Cash is an annual yield metric — it compares this year's cash flow to your invested capital. IRR is a hold-period metric that factors in all cash flows across the entire investment horizon, including the exit, discounted for time. A deal might show a mediocre 5% cash-on-cash but a strong 18% IRR if significant forced appreciation is expected at exit. Conversely, strong cash-on-cash with a flat exit can produce a lower IRR than expected. Good underwriting requires examining both.
• What is a typical commercial loan amortization period?
  Commercial mortgages commonly amortize over 20 to 30 years, with loan terms (balloon periods) of 5, 7, or 10 years. Unlike residential mortgages where the loan is fully amortizing, commercial loans often have a balloon payment — meaning the full remaining balance is due at the end of the term. This calculator uses a fully amortizing model; in practice, you would typically refinance or sell before the balloon date. Always account for balloon risk in your hold-period strategy.