How Commercial Underwriting Differs From Residential

The first commercial purchase surprises most investors, because almost nothing carries over from the residential process. The property stops being collateral for your income and starts being the income itself.

The borrower matters less

On a house, a lender underwrites your salary, your credit and your debt-to-income ratio. On a commercial building, those still matter, but the decision turns on whether the building services its own debt. A strong borrower cannot rescue a weak rent roll.

Net operating income is the number

NOI is gross rent, less vacancy, less operating expenses — before financing and before depreciation. Value follows NOI directly: raise NOI and you raise the appraised value, regardless of what comparable buildings sold for. That is the single biggest structural difference from residential, where comparables dominate.

Shorter terms, and a balloon

• Amortization is often 20–25 years while the term is only 5–10
• A balloon payment falls due at the end of the term
• Rate resets are common at each renewal

You are underwriting a refinance you have not arranged yet. Plan the exit before you sign the entry.

Recourse and reserves

Expect a personal guarantee on smaller deals, and expect the lender to require reserves for taxes, insurance and capital expenditure. Those reserves are not optional overhead — they are the lender's protection against the building falling behind on maintenance.

What to prepare

A rent roll, trailing twelve months of operating statements, a schedule of leases with expiry dates, and a capital plan. If the seller cannot produce those, that itself is information about how the building has been run.