← Insights

Should you buy the building? How to test the purchase before you close

A building is a bet on the income it can produce. Here is how to test that bet before you sign the purchase agreement.

You are buying the income, not the walls

A commercial property is worth what it can reliably earn, whether you occupy it yourself or lease it out. The listing price and the appraisal tell you what the market thinks the asset is worth today. Neither one tells you whether the building will carry its own debt and throw off enough cash to be worth your capital. That is the question a feasibility read answers before you close.

Will the rent, or the savings, cover the loan

If you are leasing the space out, the test is whether the achievable rent, after realistic vacancy and the cost of running the building, covers the mortgage with room to spare. If you are moving your own business in, the test is whether owning genuinely beats what you pay now once you count taxes, insurance, maintenance, and the capital you are tying up. Owners routinely compare the mortgage payment to their current rent and stop there, which leaves out the costs that make ownership more expensive than it looks.

The costs a listing leaves out

A pro forma from a broker is a selling document, and it tends to show a stabilized year with full occupancy and tidy expenses. The real building has a roof with a lifespan, a parking lot that cracks, tenants who leave, and a tax bill that resets when the sale records. A sound analysis puts the deferred maintenance, the reserves, and the turnover on the page, because those are what turn a promising cap rate into a break-even year.

What the bank is going to check

A lender is going to run the property against its own coverage floor, the ratio of income to debt payments it requires before it will lend. If your deal only clears that floor in a perfect year, you will find out at the worst possible moment, after you have spent money on the pursuit. Running the property against a realistic version of that same test first means you walk in already knowing whether it finances.

Knowing your walk-away number

Testing a purchase gives you more than a verdict. It gives you a price. The work tells you what the building is worth to you given what it can actually earn, which is a number you can negotiate toward and a point past which you walk. That discipline is what keeps a good building from becoming a bad deal.