Last night on our CRE Accelerator mastermind call, we got into a really great discussion around one question that keeps coming up: where do you actually go to find a flex building? Whether you're looking to buy an existing industrial facility and convert it into smaller flex suites, or you're trying to figure out where to build flex from scratch, the location question is everything.
So I figured we'd dive into it on this episode of Office Hours. I'm going to walk you through exactly how I would go about finding the right location for a flex space deal, and then we're going to hop on Crexi, pick a random industrial building somewhere in the US, and underwrite it live. That way you can see my entire process from start to finish. We found a deal, fully underwrote it, and had results in about 10 minutes. It's 9:06 a.m. and we started at 8:30. So don't ever tell me you can't find deals.
In This Article
How to Find the Right Location for a Flex Building
Picking a Random Industrial Deal on Crexi
Commercial Real Estate Underwriting: Step by Step
The Deal at a Glance
$315K
Purchase Price
4,260 SF
Building Size
$74/SF
Price Per Foot
16.7%
Projected IRR
How to Find the Right Location for a Flex Building
Before we even talk about commercial real estate underwriting, you need to know where to look. And this is where most people get it wrong. They start searching in the hottest part of town, the most desirable areas, and immediately get priced out. Here's how I think about it.
I pulled up Boulder, Colorado on the livestream to walk through this. You've got your downtown core where everything is expensive. Then you've got the suburban ring where retail and office dominate. You don't want to treat flex like retail. If you're trying to do flex space in the middle of everything, you're going to be paying 200, 250, 300 plus per square foot, and you're competing with retail and owner-occupiers. As an investor, you'll never be able to compete with a business that actually wants to pay to have their space somewhere.
What you want to do is find the major thoroughfares in and out of town. In Boulder, that's Highway 7, Highway 119, and Highway 36. I looked at the area heading southeast on Highway 36, maybe 20 minutes outside of town, halfway between Boulder and Broomfield. That's a great spot for flex because tenants can easily service both Boulder and Broomfield, and you've got a major thoroughfare providing easy access in and out.
The same logic applied near Lafayette on Highway 7. I was looking for intersections where a major north-south road crosses your east-west thoroughfare. Those junctions are where you want to be searching for existing buildings or sending letters to owners. The key takeaway: don't try to do flex in the middle of town. Get out to where land is more affordable but access is still good. Look for clusters of small industrial buildings along those major corridors. If you see roll-up doors, contractor trucks, and small business signage, that's a market with proven demand for industrial real estate.
Picking a Random Industrial Deal on Crexi
To show you how this works in practice, I hopped on Crexi and filtered for industrial listings: flex, warehouse, and distribution. I got rid of refrigerated, cold storage, manufacturing, and R&D. The reason I kept warehouse and distribution alongside flex is that you can always cut those spaces up into something smaller.
I picked Kansas City on a whim. Hadn't done anything there in a long time. First thing I did was remove the boundary filter because Kansas City goes across two states and I didn't particularly care about any of that. Then I set a max price of $100 per square foot because I know that building brand new flex from the ground up costs somewhere between $120 and $150 a foot. If I find something at $100 a foot that I just have to throw some walls up in, it's probably not going to work because I'd be pushing $120 all-in and I'm not competitive against new construction at that point.
Man, stuff is cheap in Kansas City. I scrolled past a few bigger buildings, $3.3 million for 77,000 feet, $2.8 million for 80,000 feet. And then I saw it: $315,000 for 4,260 square feet. That's only $74 a foot. Super approachable deal. It had been sitting on the market for 243 days with a single photo. Classic. The address was 9118 East 72nd Terrace in Raytown, Missouri, just southeast of downtown Kansas City.
I always pull up Google Street View before I do anything else. I want to see the building, the surrounding area, and what's actually happening on the ground. This listing said it had a loading dock. It didn't. It had a roll-up door. That's a huge difference. Brokers mislabel things all the time, or an assistant selects a loading dock instead of a roll-up door. It seems like a small detail, but a tenant who needs a loading dock will pass on this building 100% of the time.
Parking looked decent around back and on the side, with some alley access. Not a super tall building, probably 9 or 10 feet of clear height after you drop in a ceiling and light fixtures. And there was only one photo on the listing with zero interior shots. Of course it's been on the market for 243 days.
Here's a quick hack: sometimes you can click on the Google My Business listing for whatever business is currently in the building and see interior photos. That way you don't have to make a trip just to see what you're working with.
Commercial Real Estate Underwriting: Step by Step
Before I even opened the deal analyzer, I did my quick back-of-napkin math. Take your price per square foot ($74), add whatever dollar amount of improvements you'd put into it (let's call it $26 to round to $100 per square foot all-in). If I can rent it out for $12 a square foot triple net, that's a 12% cap rate on my total all-in costs. That tells me it's worth underwriting. If that number doesn't work, I don't waste my time going any further.
I also pulled up lease comps in the area on Crexi. I found a few that were relevant: $12 a foot for something in better condition, $11 a foot for a rougher space, and $24 a foot for a warehouse with outdoor storage (inflated because of the land). So $10 to $12 a foot felt pretty reasonable for this area.
My plan for the building: divide it into two bays of roughly 2,130 square feet each, add a second roll-up door on the other end with a small driveway, do some basic interior work, and upgrade the landscaping. At $20 a foot, that gives us roughly $80,000 for renovations, which is more than enough for this scope. If you're curious about what these types of improvements actually cost, check out how to buy your first commercial property for a deeper dive into budgeting your first deal.
Then I plugged everything into the calculator. Here are the exact inputs I used:
Purchase price: $315,000 (asking price)
Building size: 4,260 square feet
Capitalized rehab: $80,000 ($20/SF)
Closing costs: 1.5%
Down payment: 25%
Interest rate: 7%
Amortization: 20 years
Loan term: 10 years
Origination fee: 1%
Interest-only period: 18 months
Operating capital reserve: $25,000 (fixed)
Min DSCR: 1.25x
Number of tenants: 2 (2,130 SF each)
Rent: $12/SF NNN
Annual rent escalations: 3%
Leasing commissions: 6% on new leases, 4% on renewals
Baseline vacancy: 7%
Operating expenses: 35% of EGI (100% reimbursed by tenants via NNN)
Exit cap rate: 8%
A few important notes on those assumptions. Unless you have loan terms in writing from a bank, I don't recommend underwriting to anything less than 25% down, 7% interest, or a 20-year amortization. Can you get better terms? Sure. But don't underwrite to them unless you know for sure.
I staggered the lease start dates on purpose: Tenant A starts October 1st, Tenant B starts November 1st. A lot of investors underwrite all leases starting on the same day, and that creates a nightmare down the road when everything comes due at once. Stagger your leases. It's okay to do a 24-month, a 36-month, a 60-month, and a 63-month lease just so you don't have all your vacancies hitting at the same time.
I also included a 7% baseline vacancy rate because the bank is going to hit you with vacancy no matter what. Even if you're buying a Starbucks triple net 15-year deal, the bank is still going to assume 5% vacancy. You want to underwrite that in.
"Your first underwriting pass doesn't have to be perfect. It's not going to be perfect because you don't have all the information. If it looks like it could work, that's when I'm calling the broker and having the conversation: what can you send me? I'm interested in this deal."
- Tyler Cauble
The Results: 16.7% IRR on a $315K Building
Here's where commercial real estate underwriting gets really exciting. I clicked calculate and the numbers came back strong. Average DSCR of 1.73x. Projected IRR of 16.7%. Annualized cash-on-cash of 19.5%. Equity multiple of nearly 2x over five years. That means we're nearly doubling our money.
Total down payment came to $107,286 at 75% LTV. By year five, NOI gets up to $51,774 with annual cash flow of $21,830. Cumulative cash flow over the five-year hold: $76,000, which works out to a 70% cash-on-cash return. Loan balance by year five drops to $288,939. And thanks to running a cost segregation study on the building, we'd save about $15,000 on taxes in year one. With an industrial building, a huge percentage qualifies for accelerated depreciation: the roll-up doors, the concrete slab, the HVAC, the electrical. That's one of the biggest commercial real estate tax benefits most new investors overlook.
Then I stress-tested it. What if we can only get $10 a foot instead of $12? Still a 17.9% IRR and 22.4% annualized cash-on-cash. What if our rehab budget also jumps from $80,000 to $100,000? Still a 14.7% IRR and 17.6% cash-on-cash. We're still nearly doubling our money over five years even in that scenario.
The bear case did show a loss of about $57,000 assuming a softer market with lower rents, higher vacancy, and an expanding cap rate. So there's not a ton of margin at $10 a foot with $100K in rehab. But at the base case numbers, this is a deal I would absolutely be calling the broker about, asking to get inside and tour, and trying to dial in my construction numbers. I'd also try to get that price down to $250,000 and see if I can get an even better deal. It's been sitting for 243 days with one photo. There's room to negotiate.
Here's a great reminder that how you analyze commercial real estate deals matters as much as the numbers themselves. The year three exit initially showed a better equity multiple than year five, which seemed off. It turned out the calculator was factoring in three months of vacancy when both leases rolled over, which dragged down the year-five NOI. When I extended the lease terms to 10 years to remove that vacancy break, the year five exit jumped to a 3.18x equity multiple with a 29% IRR.
You Probably Already Know Your First Investors
At $315,000 with about $107,000 to close, this isn't a deal you need to syndicate. Maybe it's you and a partner, one money person. But someone asked during the livestream about raising capital as a beginner, and my answer is always the same: scroll through your phone. I guarantee you have a hundred people in your contacts who could invest $5,000 or $10,000 or more. Start calling them. Tell them the types of deals you're going after, the returns you're targeting, and ask if they'd be interested in investing when you find the right one. Write every single name down.
That's how I did it. I was 25, didn't have the money, had been in the business for five or six years, and just called a couple of people I knew. Got $50,000 each from them. It's not glamorous, but it works.
Key Takeaways
Don't look for flex in the middle of town. Find the major thoroughfares in and out of the city and search along those corridors, 15 to 20 minutes from the core. That's where the land prices make sense and the tenant demand is proven.
Use back-of-napkin math before you underwrite. Take your price per square foot, add your rehab cost per foot, and see if your target rent gives you a 12% cap rate on all-in costs. If it doesn't pencil at that level, move on.
Always verify listing details with Google Street View. This building said it had a loading dock. It didn't. Brokers mislabel things all the time, and it's a massive difference for your tenants.
Underwrite conservatively unless you have real numbers. Don't go below 25% down, 7% interest, or 20-year amortization unless a bank has given you those terms in writing.
Stagger your lease start dates. If all your leases start and end on the same date, you'll have every tenant's vacancy hitting at once. Offset them by 30 to 60 days to spread the risk.
Stress test every deal. This one worked at $12/SF rent. It still worked at $10/SF. It still worked even if rehab jumped from $80K to $100K. That's how you know you have margin.
Deals are everywhere. I found and fully underwrote this one in 10 minutes on a random Tuesday morning. Don't tell me there are no deals out there.
This article is adapted from a live episode of Office Hours on the Tyler Cauble YouTube channel. If you want to watch me underwrite this deal in real time, see my screen as I walk through the calculator, and hear me answer audience questions, watch the full episode above. If you want to try the calculator yourself, head to tylercauble.com/analyzer for a free version of the software.
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