Rule of Three Commercial Real Estate: What It Is and How It Works

When you hear the rule of three commercial real estate, a simple heuristic used by investors to quickly judge if a commercial property is worth pursuing. It's not a law, but a practical filter that separates good opportunities from the noise. This rule says: if a commercial property generates at least three times the annual rent in sale price, it’s likely a solid buy. So if a building brings in $100,000 a year in rent, you shouldn’t pay more than $300,000 for it. That’s the sweet spot where cash flow and value align.

This rule ties directly to commercial property valuation, how much a property is truly worth based on its income, not just square footage or location. It’s not about fancy appraisals or glossy brochures—it’s about hard numbers. Investors use it because it cuts through the hype. A building in a trendy area might look great, but if the rent is low and the price is high, it’s not a good deal. The rule of three forces you to ask: does this property pay for itself? And if it doesn’t, why are you buying it?

It also connects to rental income rule, a broader category of metrics that measure how well a property generates cash. Think of it like a car’s fuel efficiency—you don’t care how sleek it looks if it guzzles gas. Same with commercial real estate. A property that doesn’t produce steady income is just a liability. The rule of three works best for office buildings, retail spaces, and industrial units where leases are long-term and tenants are reliable. It’s less useful for short-term rentals or properties with high vacancy risk.

You’ll also see this rule paired with other metrics like the 2% rule for investment property, a similar guideline used for residential rentals, where monthly rent should be at least 2% of the purchase price. The rule of three is the commercial version of that—scaled up for bigger deals and longer leases. But unlike the 2% rule, it’s not about monthly numbers. It’s about annual income versus total cost. That’s why it’s so powerful for serious investors who want to avoid overpaying.

What makes this rule so useful is how fast it works. You don’t need a spreadsheet or a broker. Just look at the asking price and the current rent. Do the math. If the ratio is worse than 3:1, walk away. If it’s better, dig deeper. That’s the power of simplicity. Many investors get lost in cap rates, NOI calculations, and tenant credit scores. But the rule of three is the first gate. It’s the filter that tells you whether the rest of the analysis is even worth your time.

And here’s the thing—it’s not perfect. Some markets, like downtown San Francisco or Manhattan, break this rule all the time because demand is insane and land is scarce. But those are exceptions. In most places across the U.S., India, Australia, and beyond, the rule holds up. It’s why you’ll find investors using it on CoStar listings, in landlord forums, and in deal rooms across the world. It’s not magic. It’s just math that works.

Below, you’ll find real-world examples, common mistakes people make when applying this rule, and how to combine it with other strategies to find truly strong commercial deals. Whether you’re looking at a small retail strip or a multi-tenant office building, these posts will show you exactly how to use the rule of three to avoid costly mistakes and find investments that actually pay off.