How To Underwrite Your First Commercial Deal (Without Getting Overwhelmed)
For new investors stepping into commercial real estate, few words spark as much anxiety as underwriting.
The spreadsheets, the jargon, the endless “what-ifs”—it can feel like you need a finance degree just to make sense of a single deal. That intimidation keeps many aspiring investors stuck on the sidelines, second-guessing themselves while opportunities pass by.
But here’s the truth: underwriting doesn’t have to be overwhelming.
At its core, underwriting is simply the process of asking: Does this property make money—and will it continue to? Once you understand the basic building blocks, you don’t need Wall Street-level modeling to evaluate whether a deal is worth pursuing.
As Tyler often reminds his students:
“You don’t have to be perfect—you just need to know what a good deal looks like.”
In this post, we’ll break down a simple framework for underwriting your first commercial deal. By the end, you’ll know how to cut through the noise, focus on what matters, and approach opportunities with confidence.
Why underwriting matters in commercial real Estate
Underwriting is the heartbeat of commercial real estate investing. It’s the process that tells you whether a deal is worth pursuing—or whether you should walk away.
In residential real estate, value is often determined by comparable sales. A three-bedroom home is worth roughly what the three-bedroom down the street sold for. But in commercial, value is tied to performance, not comps. A property is worth what its income supports.
That’s why underwriting matters so much:
It protects you from costly mistakes.
It helps you identify hidden upside.
It gives you the confidence to move quickly when the right deal comes along.
“In residential, you guess at value. In commercial, you create it.” That’s because every decision you make—adjusting rent, cutting expenses, structuring leases—directly impacts the property’s value.
The difference between winning big and losing money often comes down to a single skill: your ability to underwrite well.
the four pillars of a simple underwriting model
At first glance, underwriting can look like a sea of numbers. But every deal boils down to four key pillars. Master these, and you’ll have 80% of what you need to evaluate any property.
1. Income
Start with the rent roll. What are tenants paying today? What’s market rent? Factor in vacancy rates—no property is 100% full forever. Conservative underwriting assumes some downtime between leases.
2. Expenses
Operating costs are where new investors often trip up. Property taxes, insurance, management fees, utilities, and maintenance all add up. Don’t forget reserves for capital expenditures like roof repairs or HVAC replacements.
3. Financing
Your debt terms can make or break a deal. Look at loan-to-value (LTV), interest rates, amortization periods, and—most importantly—the debt service coverage ratio (DSCR). Lenders typically require a DSCR of at least 1.25, meaning the property must generate 25% more income than the debt payment.
4. Value
In commercial real estate, value is a formula: Net Operating Income (NOI) ÷ Cap Rate = Property Value.
This is what makes CRE so powerful—you can directly influence value by increasing NOI through rent growth or expense reduction.
When you analyze a deal through these four lenses—Income, Expenses, Financing, and Value—you move from overwhelm to clarity. Suddenly, underwriting is less about complex math and more about telling the story of the property’s performance.
common mistakes new investors make
For first-time commercial investors, underwriting mistakes usually don’t come from bad math—they come from bad assumptions. Here are the pitfalls to avoid:
1. Using Residential “Comps”
In residential, you value a home by what the neighbor’s house sold for. In commercial, value is tied to income, not appearances. A property that looks rough but has strong tenants and leases could be worth more than a pristine building with weak rent rolls.
2. Underestimating Expenses
It’s easy to focus only on mortgage and taxes while ignoring things like reserves, capital expenditures, or rising insurance premiums. A deal that looks profitable on paper can collapse in practice if you underestimate operating costs.
3. Overestimating Rent Growth
Assuming rents will climb every year is a fast way to overpay. Market cycles shift, tenants negotiate, and vacancy happens. Always stress-test your numbers with conservative assumptions.
4. Ignoring the DSCR
Lenders don’t care about your excitement—they care about whether the property can comfortably cover debt. A DSCR below 1.25 signals risk. If the deal doesn’t meet that threshold, it’s either not ready—or not worth it.
The bottom line: Bad assumptions kill good deals. Avoid rosy projections. Underwrite with discipline, and you’ll protect both your capital and your confidence.
a practical framework to stay confident
Underwriting doesn’t have to be a monster spreadsheet with hundreds of tabs. In fact, the best investors keep it simple. The goal is not perfection—it’s clarity.
Here’s a framework you can use on every deal:
Start with a back-of-the-envelope test.
Take projected income, subtract rough expenses (30–40% is a safe rule of thumb for many asset types), and see if there’s enough left to cover debt.
If the deal doesn’t pass this first filter, move on quickly.
Dig deeper only on promising deals.
Once a property looks feasible, build out a simple spreadsheet. Include rent roll, actual expenses, projected NOI, debt terms, and DSCR.
Test conservative and aggressive scenarios to see how the numbers shift.
Focus on the drivers you can control.
Can you raise rents to market?
Can you reduce expenses with better management?
Can you structure leases to shift responsibility to tenants?
Lean on tools, not just instincts.
Free CRE calculators, underwriting templates, and Tyler’s step-by-step models are designed to help you get to an answer quickly without spinning your wheels.
The key is to build a repeatable process. Over time, underwriting stops feeling like a math exam—and starts feeling like second nature.
When to dig deeper (and when to walk away)
Not every deal deserves hours of analysis. One of the biggest mistakes new investors make is spending too much time trying to “make the numbers work” on a property that was never a good fit in the first place.
Here’s a simple rule of thumb:
Walk Away Quickly if…
The rent roll is weak and far below market.
Expenses already exceed reasonable benchmarks.
DSCR is below 1.25 even with optimistic assumptions.
There’s no clear path to adding value.
Dig Deeper if…
The numbers pencil out on a back-of-the-envelope test.
Market rents show upside potential.
There are operational efficiencies you can unlock.
Financing terms look favorable.
By filtering fast, you save time and energy for the deals that truly matter.
Remember: there will always be another deal. Commercial real estate isn’t about chasing every opportunity—it’s about recognizing the right ones and moving decisively when they appear.
Conclusion
Underwriting your first commercial deal doesn’t have to feel overwhelming. Once you break it down into the fundamentals—income, expenses, financing, and value—you’ll see that the process is far less intimidating than it looks on the surface.
The key is discipline. Avoid emotional decision-making. Don’t inflate numbers to make a deal work. And remember that walking away from a bad deal is just as much a win as closing on a good one.
Over time, underwriting shifts from being a source of stress to being a source of confidence. You’ll know when a deal is worth pursuing, when it’s worth negotiating, and when it’s time to pass.
If you can master that mindset, you’ll not only underwrite your first commercial deal—you’ll build the foundation for a portfolio that grows stronger with every property you acquire.
For those interested in delving deeper into commercial real estate investing, check out our course offerings. The courses provide in-depth insights, real-world case studies, and practical strategies to help you navigate the complexities of commercial real estate and achieve success in your ventures. Whether you're a seasoned investor or just starting in the world of commercial real estate, there's always more to learn. Equip yourself with the knowledge and tools you need to thrive in commercial real estate!
Commercial real estate has long been a reliable vehicle for generating passive income, preserving wealth, and leveraging tax advantages. But what happens when the math doesn’t make sense—when cap rates fall below the interest rates you’d pay to finance a deal?
In today's high-rate environment, that's exactly what many investors are facing. With properties still trading at cap rates of 4–6% while borrowing costs sit at 7% or more, the numbers don’t pencil out as easily as they used to. For aspiring and seasoned investors alike, this raises a major question: How do you buy when the deal cash flows don’t work at face value?
Let’s break down what it means when cap rates are lower than interest rates—and five ways you can still acquire profitable commercial real estate in this tough climate.