12-24-2025, 03:04 AM
I'm looking to purchase my first commercial real estate investment, a small multi-tenant retail strip, and I'm trying to thoroughly understand the cap rate analysis provided by the broker. The listed cap rate is 6.5%, which seems in line with the area, but I'm unsure how much weight to give it given that the current rents appear below market, and there's a major tenant's lease expiring next year. For experienced investors, how do you adjust a pro forma cap rate to reflect these kinds of specific risks and value-add opportunities? What other metrics, like debt service coverage ratio or going-in cash-on-cash return, do you prioritize alongside the cap rate when underwriting a deal, and how do you realistically project operating expenses to avoid underestimating the true net operating income?