How to Evaluate a Commercial Property’s ROI

Return on investment is the number that tells a buyer whether a commercial deal is worth the capital, the time, and the risk. Calculating ROI correctly on a Salt Lake City commercial property takes more than a back of the envelope pass, because the right number depends on how the building is financed, what expenses actually hit, and what the owner realistically expects to earn over the hold period.

The simplest version is cash on cash return, which divides annual pre tax cash flow by the cash invested. A Wasatch Front flex building purchased for $2 million with 30 percent down, $600,000 in equity, producing $54,000 of annual cash flow after debt service delivers a 9 percent cash on cash return. That ignores principal paydown, appreciation, and tax benefits, but it is a clean headline number for year one.

A more complete picture comes from total return. That adds annual cash flow, mortgage principal paydown, appreciation, and depreciation tax savings, then divides by equity invested. On the same $2 million building, principal paydown might add another $18,000 of equity buildup a year, appreciation at 3 percent adds $60,000, and depreciation creates a paper loss that offsets taxable income. Stacked together, total return often lands in the 12 to 16 percent range on stabilized Salt Lake City commercial property, which is why CRE attracts serious capital.

The trap most first time buyers fall into is using optimistic numbers. Rents are modeled at market when leases are actually below market. Expenses skip reserves for the roof, HVAC, and parking lot. Vacancy assumes full occupancy forever. Utah property taxes use the seller’s bill rather than the buyer’s post sale assessment. Each of those assumptions individually might move ROI by a point or two. Together they can turn a real 8 percent return into a projected 12, which explains why some deals look great on paper and disappoint in practice.

There is also a local wrinkle worth calling out. Salt Lake City commercial buildings in older submarkets like the Granary district or Sugar House often trade at higher cap rates because they need seismic retrofit or mechanical updates. The ROI looks strong until capital work lands, and then cash flow tightens for a year or two. Buyers should model capital reserves realistically, sometimes $2 to $4 per foot per year, rather than pretending a 60 year old building will coast through a 10 year hold without repairs.

Exit matters too. A good ROI calculation includes an assumed sale price at the end of the hold period, usually based on projected NOI and an exit cap rate that is slightly higher than entry to account for aging. Internal rate of return, or IRR, wraps all of this into one number by accounting for the time value of money. Institutional investors look at IRR more than cash on cash because it reflects the full picture.

Omada Commercial, recognized as top commercial realtors in Salt Lake City, builds full ROI models for clients considering acquisitions across the Wasatch Front. That includes rebuilt rent rolls, realistic expense lines, proper reserves, and exit assumptions grounded in current Salt Lake City cap rate data. Buyers who evaluate ROI properly buy better properties and hold them with fewer surprises.