Buying commercial real estate is driven by numbers, not emotion — and the numbers need to be run correctly before you commit to anything. Here is the analytical framework to use.
Published October 3, 2026 · By Jon Tennant
Buying commercial real estate is a fundamentally different process than buying a home. The decision is driven by numbers, not emotion, and the numbers need to be run correctly before you commit to anything. Whether you are looking at a small retail strip, an office-warehouse building, or a multi-tenant investment property in the Triangle, here is the analytical framework to use.
Everything in commercial real estate analysis flows from Net Operating Income (NOI). NOI is the annual income the property generates after operating expenses, before debt service.
The calculation starts with Gross Potential Rent, the total rent the property would generate if it were 100% occupied at current market rates. From there, subtract a vacancy and credit loss allowance, typically 5% to 10% depending on the property type and market. That gives you Effective Gross Income. Then subtract all operating expenses: property taxes, insurance, property management fees, maintenance and repairs, utilities paid by the landlord, and any reserves for capital expenditures. What remains is NOI.
Example: A small retail building in Cary generates $84,000 in gross potential rent. A 5% vacancy allowance reduces that to $79,800 in effective gross income. Operating expenses of $22,000 bring NOI to $57,800.
Once you have NOI, divide it by the purchase price to get the cap rate.
$57,800 NOI divided by $850,000 purchase price equals a 6.8% cap rate.
Compare that to where similar properties are trading in the Triangle right now. Industrial and flex space is transacting at 4.5% to 5.2%. Office is 6.0% to 7.0%. Retail in strong corridors runs 7.0% to 8.2%. A 6.8% cap rate on retail in Cary is on the lower end of the retail range, which makes sense given Cary's strong market fundamentals and low vacancy.
If the cap rate on the deal is significantly below where comparable properties are trading, you are either overpaying or the property has a quality premium that justifies the spread. Both are worth understanding before you proceed.
Cap rate does not account for financing. Cash on cash return does. It measures the annual cash flow you actually receive as a percentage of the cash you actually invested.
To calculate it, take your NOI and subtract your annual debt service (mortgage payments). The remaining number is your pre-tax cash flow. Divide that by your total cash invested (down payment plus closing costs) to get your cash on cash return.
Continuing the example: $57,800 NOI minus $42,000 in annual debt service on an $680,000 loan at 6.75% over 25 years equals $15,800 in pre-tax cash flow. If you put $200,000 down (including closing costs), your cash on cash return is 7.9%.
In the current Triangle market, 6% to 8% cash on cash is considered a realistic target for well-structured deals. Below 5% means the deal is primarily an appreciation play with minimal current income. Above 10% in this market usually means elevated risk somewhere.
Never run your analysis at 100% occupancy. Model a realistic vacancy scenario. What happens to your cash flow if one tenant leaves and takes three months to replace? If your property is single-tenant and that tenant goes dark, what is your exposure?
Also model your debt service at a higher interest rate than today. If you are buying at a floating rate or plan to refinance in five years, what does the deal look like at 7.5% or 8%? Deals that only pencil at the lowest possible rate and highest possible occupancy are fragile. Good deals hold up under stress.
The quality of a commercial investment is often the quality of its leases. Understand these elements for every tenant in the building.
Numbers do not tell you everything. Walk the property and look at it with fresh eyes. How old is the roof? When was the HVAC last replaced? What is the condition of the parking lot, the electrical system, the plumbing? Capital expenses that hit in years one through five can dramatically alter your actual returns versus your underwritten returns.
Ask for a capital expense history and any existing inspection reports. Budget a realistic capital reserve into your model even if the property looks good on the surface.
Commercial real estate is location-driven even more than residential. What is the vacancy rate for comparable properties within a mile? What are market rents doing and in which direction? Are there new competing developments planned nearby that could affect your ability to lease at current rates?
For the Triangle specifically, industrial and flex vacancy is tight, retail vacancy in quality corridors is extremely low at around 3%, and office is improving after post-pandemic disruption. Understanding where your specific property sits within those broader trends is essential context for your investment thesis.
Investors who buy commercial real estate in the Triangle are not just buying current cash flow. They are buying into one of the most durable growth markets in the Southeast. Population growth, corporate investment, and a highly educated workforce create long-term demand that supports both occupancy and rent growth over time.
That fundamental demand is why Triangle commercial cap rates are lower than comparable assets in slower-growth markets. Investors are paying for certainty and upside that the market's fundamentals deliver.
At Jon Tennant Real Estate and Business Brokerage, we work with commercial investors across Wake and Durham County. Reach out if you are evaluating a commercial acquisition and want a broker-level read on the deal.
Evaluating a commercial acquisition in the Triangle? Get a broker-level read on the deal before you commit.
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