April 30, 2025 • General
If you’re thinking about buying a commercial property, whether it’s a strip mall, office space, or industrial building, you want to know it’s making money—and that it will keep making money. While most people jump straight to looking at the cap rate, that’s only part of the full financial picture. Here’s a breakdown of what to look for when figuring out if a property is really a solid investment.
1. Start with Net Operating Income (NOI)
This is the number that tells you how much the property earns after you subtract operating expenses like property taxes, insurance, maintenance, utilities, and management. It doesn’t include the mortgage.
In short:
NOI = Rent collected – Day-to-day expenses
If the NOI is steady or going up year over year, that’s a good sign. If it’s flat or dropping, dig deeper.
2. Cap Rate Isn’t Everything—But It’s Still Important
The cap rate gives you a snapshot of your expected return based on the property’s income and price.
Cap Rate = NOI ÷ Purchase Price
When buying commercial property in a place like Amarillo, cap rates are often between 6% and 9%, depending on location and property type. A higher cap rate usually means more risk—but possibly higher returns. A lower cap rate often means lower risk, but don’t expect huge returns.
3. What’s the Occupancy Situation?
Vacancies can drain a property fast. A strong occupancy rate—something above 90%—means tenants are staying and paying. If you’re looking at a building with lots of empty units, find out why. Is it bad management? Poor location? Or just under-marketed?
Also check the history. Has the property had long-term tenants, or is there constant turnover?
4. Who Are the Tenants and What Do Their Leases Look Like?
Having a grocery store or medical tenant on a long-term lease is way better than a building full of short-term leases from businesses that might close next year. Look at:
- Lease lengths
- When leases expire
- If the rent goes up each year
- Who pays for things like maintenance and taxes (NNN vs. gross leases)
The more reliable and staggered the leases are, the more stable your income is likely to be.
5. How Much Does It Cost to Run the Property?
Operating expense ratio is a quick way to see how efficient a building is.
Operating Expense Ratio = Expenses ÷ Gross Income
Lower is better. A newer industrial building might have a low ratio, while an older office building with elevators, shared utilities, and constant repairs might be more expensive to operate.
6. Debt Service Coverage Ratio (DSCR)
If you’re getting a loan, the bank will want to see that the property earns more than enough to cover the mortgage.
DSCR = NOI ÷ Loan Payments
A ratio of 1.25 or higher is typically considered safe. Anything close to 1 means you’ll be tight on cash if anything goes wrong.
7. What Big Expenses Are Coming?
Look beyond what’s happening today. Ask about:
- Roof age
- HVAC systems
- Parking lot condition
- Any deferred maintenance
Even if the numbers look good now, a new roof or major repairs can wipe out your profits for the year. Make sure there’s a plan (and budget) for those future costs.
Wrapping It Up
A commercial building with solid income, responsible tenants, manageable expenses, and no big surprises on the horizon is probably worth a closer look. But don’t rely on just one number like cap rate. Dive into the full picture—NOI, lease details, vacancy trends, expenses, and upcoming repairs.
The goal is to invest in a property that not only looks good on paper today but can continue to perform for years to come. If you’re planning on buying commercial properties in Amarillo or nearby, Wellborn Real Estate is here to help you sort through the details, run the numbers, and make a smart move.