Pillar · Underwriting
Underwriting Fundamentals
How to underwrite a commercial real estate deal the way a disciplined buyer does — separating the broker’s pro-forma from the numbers you’ll actually live with: real reserves, true cap rate, the capital stack, and the metrics lenders test.
Disciplined underwriting is precise about three things generalists blur
Effective income, not asking rents. Start from gross potential rent, then subtract vacancy, credit loss, and concessions to reach effective gross income. The gap between asking and effective is where optimistic pro-formas quietly inflate value.
Where reserves sit changes the answer. Replacement reserves are real cash, but placement depends on the question. For valuation and cap-rate comparison, use NOI before reserves — that's how the market quotes and trades, the distinction the broker cap vs. true cap guide walks. For cash-flow returns (IRR, cash-on-cash), use NOI after reserves, because that money actually leaves your account — exactly what the reserves-and-returns teardown shows.
One deal, many scenarios. A single base case is a guess. Underwriting means testing rent growth, exit cap, and hold period so you know which assumption the deal hinges on.
At an $8,500,000 price, the two NOIs give two different cap rates:
| Basis | NOI | Cap rate |
|---|---|---|
| Pre-reserves | $590,000 | 6.94% |
| Post-reserves | $540,000 | 6.35% |
A ~60 basis-point swing on the same building. The discipline: pre-reserves NOI for valuation and cap-rate comparison (apples-to-apples with the market); post-reserves NOI for cash-flow returns (reserves are real cash). Mixing the two is one of the most common ways underwrites overpay.
How are these numbers computed? See how UpsideIQ underwrites →
Free calculators
Cap Rate Calculator
See the broker cap and the true (post-reserves) cap side by side — the gap sellers don't show you.
Open the calculator → CalculatorDSCR Calculator
Check whether NOI covers debt service — the first test every lender runs.
Open the calculator → CalculatorIRR & Equity Multiple Calculator
Estimate levered return and total multiple from a simple cash-flow stream.
Open the calculator →Guides & teardowns
Cap Rate vs. Yield on Cost
Cap rate vs yield on cost explained — going-in cap measures the price you pay, yield on cost measures the return you build through value-add capex.
Read → underwritingCash-on-Cash Return, Explained
A plain-English cash on cash return guide — annual pre-tax cash flow divided by total cash invested, why it's a year-one snapshot, and how it differs from IRR.
Read → underwritingIRR vs. Equity Multiple: Why Two 2.0x Deals Aren't Equal
Understand IRR vs equity multiple — why two deals returning the same 2.0x can have wildly different IRRs because IRR weights time and the equity multiple ignores it.
Read → comparisonNOI vs. EBITDA
NOI vs EBITDA explained — NOI is a property-level income measure, EBITDA is company-level; in a sale-leaseback the tenant's EBITDAR must cover the rent.
Read → underwritingNet Operating Income (NOI): How It's Calculated
A clear net operating income calculation walkthrough — EGI minus operating expenses equals NOI, and exactly what NOI excludes (debt, capex, depreciation, tax).
Read → underwritingHow to Build a Commercial Real Estate Pro Forma
Learn how to build a commercial real estate pro forma step by step — from gross potential rent through vacancy, EGI, operating expenses, and NOI.
Read → underwritingReplacement Reserves in Underwriting
A replacement reserves underwriting guide — what they are, why they belong below NOI, and how a small per-unit reserve quietly changes value by hundreds of thousands.
Read → underwritingSensitivity Analysis: How Exit Cap Rate Moves Value
A real estate sensitivity analysis primer — hold NOI constant, flex the exit cap rate, and watch how a 50 bps move swings value by hundreds of thousands of dollars.
Read → TeardownThe Reserves Line That Quietly Kills Your Returns
The same building underwritten with and without reserves — how skipping the reserve line overstates cap rate, cash flow, and IRR, and the convention that keeps you honest.
Read → underwritingBroker Cap Rate vs. True Cap Rate: What Sellers Don't Show You
Brokers quote cap on gross, pre-reserves NOI; the true cap backs out reserves and real landlord costs. Learn to compute each and why the spread decides the price.
Read →Key terms
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