Lesson one
The five numbers that decide every deal
Everything else is detail. If you understand these five, you can hold a conversation with
any broker, lender or seller in the Lowcountry.
- NOI
- Net operating income. Everything the property collects,
minus everything it costs to run — but before the mortgage. Taxes, insurance,
management, maintenance, vacancy, reserves all come out. The loan does not. NOI is the
property's earnings as a business, independent of how you financed it.
- Cap rate
- NOI divided by price. What the building yields if you paid all cash.
It's how commercial property is priced and how it's valued at exit.
- DSCR
- NOI divided by the loan payment. Above 1.00, the building pays its own
mortgage. Lenders usually want 1.20–1.25. This is the number that decides
whether you get the loan.
- Cash-on-cash
- Annual cash left over, divided by the cash you actually put in.
NOI is the building's return. Cash-on-cash is your return.
- Exit value
- NOI at sale divided by the cap rate a buyer will pay then. Notice
what's missing: appreciation. Commercial property isn't worth more because time passed —
it's worth more because it earns more.
The one that trips everyone: NOI never includes the
mortgage. People subtract their loan payment, call it NOI, and end up with a cap rate that
makes no sense. If your NOI changes when you change your down payment, you've done it wrong.
Lesson two
How to read a rent roll — and what it hides
The rent roll is the single most important document a seller gives you, and it's the one
most likely to be flattering. Here's what to actually look at.
- Contract rent versus market rent. A seller will show you what leases
say. Ask what comparable units actually lease for today. A gap either way is your whole
thesis — or your whole problem.
- Lease expiration dates. If eight of twelve leases expire within
ninety days of closing, you didn't buy a stabilized building. You bought a leasing project.
- Month-to-month tenants. Flexibility if you're raising rents. Risk if
you're counting on the income.
- Concessions. "One month free" doesn't show up in the monthly rent
column, but it's a real reduction in what the property collects.
- Delinquency. Ask for a tenant ledger, not just the roll. A unit
listed at $1,400 that has paid $700 twice this year is not a $1,400 unit.
- Who pays what. Water, trash, pest, lawn — if the owner covers them,
they come straight out of NOI. On small multifamily this is routinely the difference
between a deal and a dud.
- Related-party tenants. The seller's cousin in unit 4 at full market
rent is a vacancy the day you close.
Steve's job on this one. He manages buildings for
a living, which means he has read more rent rolls than most brokers ever will — and he knows
which Charleston owners keep clean books.
Lesson three
What operating expenses actually run
This is where optimistic underwriting goes to die. Four expenses get left out of almost
every back-of-the-napkin analysis, and together they routinely swing NOI by fifteen to twenty
percent.
- Vacancy
- Not "my building will be full." Every building turns over. Model it as
a percentage of gross rent so it moves when rent moves — a flat dollar figure quietly
becomes wrong the moment you raise rents.
- Reserves
- Roofs, HVAC, water heaters, parking lots. They don't fail this year,
they fail some year. Setting nothing aside doesn't mean it's free; it means you'll fund it
from savings at the worst moment.
- Management
- Budget it even if you self-manage. If you don't pay a manager,
you're the manager, and your time has a price. It also means the building's numbers still
work the day you want to stop.
- Turnover
- Paint, cleaning, flooring, the lost weeks between tenants. Separate
from routine maintenance, and it scales with how often people leave.
Reality check: if your expense load is under about 35% of
collected income on small multifamily, something is probably missing. Well-run buildings often
land closer to 40–50% once management and reserves are honestly funded. Older buildings and
owner-paid-utility buildings run higher still.
Lesson four
Cap rate is a price, not a quality score
People talk about cap rate like a grade — as if higher is better. It isn't. It's the market
telling you what it charges for that income.
Cap rate = NOI ÷ PriceWhich also means: Price = NOI ÷ Cap rate
A low cap rate means buyers will pay a lot for a dollar of income there — usually because
they believe the income is safe and growing. A high cap rate means they won't — usually
because something about the location, the building or the tenants worries them. A high
cap rate is compensation for risk, not a bargain.
The part that matters most: exit cap. You buy at one cap rate and sell at whatever
the market gives you later. If you buy at a 6 and sell at a 7, the building can earn more and
still be worth less. Every honest projection assumes you exit at a slightly worse cap rate
than you bought at, because assuming otherwise is how people talk themselves into deals.
The lever nobody mentions: at a 6.5% cap, every extra
$1,000 of annual NOI adds about $15,400 of value. That's why raising rent $50 a month across
ten units isn't a $6,000 win — it's closer to a $92,000 one.
Lesson five
How good-looking deals actually fall apart
- The insurance quote. Coastal South Carolina. Wind, hail and flood
coverage can cost multiples of what an inland investor expects, and it comes straight out
of NOI. Get a real quote before you're hard on earnest money, not after.
- The tax reassessment. Property taxes are often based on the seller's
old assessed value. Your purchase price can reset it. Budget the tax bill you'll
get, not the one the seller has.
- The appraisal comes in low. The lender lends against the lesser of
price or appraised value. If it appraises short, the gap is cash from your pocket.
- DSCR, not LTV, sets the loan. You planned on 75% leverage and the
income only supports 61%. That difference is cash you have to find. Run it before you're
under contract.
- Deferred maintenance found at inspection. Roof, electrical, plumbing,
structure. Either it becomes a price reduction or it becomes your problem.
- Environmental on commercial. Old gas station, dry cleaner, auto shop
anywhere in the chain of title and a lender may require a Phase I — time and money you
didn't schedule.
- Estoppels don't match the rent roll. When tenants confirm their own
lease terms in writing and the numbers differ from the seller's roll, you just learned
something important.
Lesson six
Investing in the Lowcountry specifically
Charleston isn't one market. It's a collection of them, and the same building produces very
different numbers depending on which side of a bridge it sits on. Rather than quote figures
that go stale, here's what to establish about any submarket before you underwrite it:
- Flood zone and elevation. This is the first question in the Lowcountry,
not the fifth. It drives insurance, financeability and resale.
- What actually leases, and in how many days. Not what's listed — what
signed, and how long it sat.
- Who the tenant base is. Medical, military, student, hospitality,
port. Each behaves differently in a downturn and lenders know it.
- Short-term rental rules. They vary by municipality and they change.
An STR income assumption is only as good as the ordinance behind it.
- What's being built nearby. New supply is the quiet killer of rent
growth assumptions.
- Flooding and drainage history on the specific street, not the ZIP code.
This is the part where a broker who lives here earns their keep.
Steve manages property across the Charleston area and sees which buildings lease and which sit.
Ask him about a submarket →
Reference
Glossary
The words people use without explaining them.
AmortizationThe schedule that pays a loan down to zero. A loan can
amortize over 25 years but come due in 5 — those are different things.
BalloonThe day the remaining balance is due in full. Common on
commercial loans and the reason exit planning matters.
BasisWhat the property costs you all in — price plus closing plus
renovation. Your real starting line.
Bridge loanShort-term financing that carries a property until
permanent debt or a sale. Fast and more expensive by design.
Effective gross incomeGross potential rent minus vacancy and credit
loss. What the building realistically collects.
EstoppelA signed statement from a tenant confirming their own lease
terms. The reality check on a seller's rent roll.
Guarantor / sponsorThe person standing behind the loan. On
commercial, the entity borrows and a human guarantees.
Interest onlyPaying interest without reducing principal. Lowers the
payment, raises DSCR, builds no equity.
LTC — loan to costLoan measured against total project cost.
The constraint that matters on renovation and construction.
LTV — loan to valueLoan measured against value. The constraint that
matters on a stabilized purchase.
Non-recourseThe lender's remedy is the property, not your other
assets. Rarer, and it costs something.
Prepayment penaltyWhat it costs to pay a loan off early. Check it
before you plan a two-year flip on five-year debt.
SREOSchedule of real estate owned. Every property you have, with
values, balances and income. Lenders read it closely.
StabilizedOccupied and operating normally. The opposite of a
property mid-renovation or mid-lease-up.
TI / LCTenant improvements and leasing commissions — the cash it
takes to land a commercial tenant. Real money, routinely forgotten.
Value-addA property that earns more once you fix or reposition it.
Also the phrase used to justify overpaying.