CRE
Underwriting a Small Retail Strip — A Step-by-Step Example
By Khai Tran · · 6 min read
Most agents avoid underwriting because it feels technical, but the truth is you only need a simple process to evaluate small retail deals with confidence. This guide walks you through a clean, real-world example you can use on your next tour.
The Real Reason Small Retail Underwriting Feels Hard
Most agents tell me they avoid underwriting because they “don’t want to mess up the numbers.” The real fear isn’t the math it’s looking unprepared in front of clients or investors. Small retail strips are the best training ground because the income is simple, the expenses are predictable, and the numbers tell a story you can learn to read.
Let’s walk through a clean, practical example you can use today.
Step 1: Gather Only the Key Inputs
You don’t need a 20-page OM to get started. Focus on the five essentials.
The Core Inputs
- Rent roll
- Current expenses
- Market rents
- CAP rates
- Vacancy, taxes, and insurance trends
Quick Intake Script for Owners
Use this when you’re on the phone with a seller or co-broker:
Example Script: “Before I run numbers, can you walk me through base rents, reimbursements, and any major expenses? I don’t need exacts; ranges are fine. I’m just looking for the operating picture.”
Step 2: Build the Income Stack
Start with what’s real today, not pro-forma.
Example Rent Roll
| Tenant | SF | Rent/Month | Rent/SF | Notes |
|---|---|---|---|---|
| Nail Salon | 1,200 | $2,000 | $20.00 | NNN |
| Cell Repair | 1,000 | $1,800 | $21.60 | NNN |
| Vape Shop | 900 | $1,700 | $22.67 | NNN |
| Boutique | 1,100 | $1,600 | $17.45 | NNN |
Monthly base rent = $7,100 Annual base rent = $85,200
Add Reimbursements (If NNN)
Assume tenants reimburse $6/SF for CAM, taxes, and insurance: Total building SF = 4,200 → $25,200 in reimbursements.
Total Income
Effective Gross Income (EGI) = Base Rent ($85,200) + Reimbursements ($25,200) = $110,400
Step 3: Apply Vacancy and Credit Loss
Even fully leased buildings need a vacancy factor.
Standard Approach
Use 5% for stabilized strips. Vacancy/Credit Loss = $110,400 × 0.05 = $5,520
Adjusted EGI
Adjusted EGI = $110,400 − $5,520 = $104,880
Step 4: Estimate Operating Expenses
With NNN strips, landlord expenses are light.
Typical Expense Line Items
- Management: 3 to 4% of EGI
- Repairs & maintenance
- Structural reserves
- Occasional non-reimbursable items
Example Expense Stack
- Management (4%): $4,195
- Repairs/Maint: $6,000
- Reserves: $4,200
- Misc: $2,000
Total OpEx: $16,395
Step 5: Calculate NOI
Net Operating Income = Adjusted EGI − OpEx
NOI = $104,880 to $16,395 = $88,485
Round to $88,500 for clean communication.
Step 6: Derive Value Using the CAP Rate
Here’s where most agents overthink. Stick to the local market CAP.
Example Calculation
If similar strips trade at 6.75%, then:
Value = NOI ÷ CAP Value = $88,500 ÷ 0.0675 = $1,311,111
Call it $1.31M.
How to Explain This to Clients
“At a 6.75% market CAP, this strip supports a value of around $1.31M based on actual income. If we improve rents or tighten expenses, the value moves immediately.”
Step 7: Run a Simple Cash-on-Cash Check
Investors want to know their return on the cash they put in, not the cap rate alone.
Debt Assumptions
- 70% LTV
- 6.25% interest
- 25-year amortization
- Annual debt service ≈ $64,500
Cash-on-Cash Example
Cash flow = NOI − Debt Service Cash flow = $88,500 to $64,500 = $24,000
Investor equity = 30% of $1.31M = $393,000
Cash-on-Cash = $24,000 ÷ $393,000 = 6.1%
Step 8: Identify the Upside (Realistic Only)
Small strips rarely need complicated repositioning. Look for two or three clean levers.
Common Upside Levers
- Under market rents
- Signage upgrades
- Lease extensions
- Cosmetic exterior work
- Small-tenant rollover opportunities
Example Upside Statement
“Two tenants are 10 to 15% below market. Renewing them at market rates alone raises NOI by ~$9K, pushing value to $1.43M at the same CAP.”
Step 9: Package the Numbers into a Clear Investor Email
Most agents lose deals because they over explain. Investors want clarity, not a novel.
Plug-and-Play Email Template
Subject: Quick Underwriting Summary: 4 Unit Retail Strip
Body: “Here’s the clean breakdown: • NOI: $88.5K • Market CAP: 6.75% • Value: ~$1.31M • Cash-on-Cash at 70% LTV: ~6% Upside: Two tenants are below market and renewals add ~$9K NOI. If this fits your buy box, want me to set up a tour?”
Step 10: Present the Deal with Confidence
Your tone matters more than your spreadsheet.
Simple Framing
Use phrases like:
- “Here’s the story the numbers are telling.”
- “Here’s what I’m seeing and why it matters.”
- “Based on the underwriting, here are the next two steps.”
Confidence isn’t loud. It’s clarity.
Download my free 10 CRE Terms Guide to strengthen your investor and client conversations.
Khai Tran, Licensed Real Estate Agent in Texas. Brokered By eXp Realty.