Best Practices When Flipping Commercial Real Estate
Modern office buildings, symbolizing best practices when flipping commercial real estate
Flipping homes has been here for a while. But now, flipping commercial real estate is becoming more and more widespread. What is more, it is increasingly popular with investors interested in making larger profits. While residential real estate has a much bigger pool of potential buyers, commercial real estate is way less competitive. And that is why there are better chances of landing a higher sale. Therefore, if investing in the real estate area that is less competitive but promises higher profits sounds interesting, we are here to present you with a few best practices when flipping commercial real estate.
How does it work?
The process of flipping commercial real estate is pretty straightforward.
Buy a piece of commercial real estate at a lower price.
Repair all that needs fixing.
Sell it at a higher price.
The catch is that you can never know precisely how much you are going to make. Sometimes, you will earn substantial amounts of money; sometimes, you may not come out tops. Unfortunately, there are no guarantees that your flip will be a success.
Furthermore, instead of selling the property after you have fixed it up, you may decide to rent it. Although you will not get a lot of money straight away, you can make a lot of profit in the long run. It can be a steady passive income, which is always good.
Tips for flipping commercial real estate
Although no one can guarantee success, there are some good practices when flipping commercial real estate that can undoubtedly improve your chances.
1. Understand the types of property
As with all real estate, supply and demand in the area you are considering investing in will determine property value. So, in areas where commercial real estate is scarce, you will naturally have better chances of higher values, rental rates, and thus, profit. Therefore, the places you want to explore will have low vacancies and limited space for new development.
Furthermore, you must know that commercial real estate is a broad term. It can imply offices, industrial real estate, retail, mixed-use properties, and multi-unit apartments. And you need to analyze each of these property types separately when determining where to invest. For instance, offices will be in the central positions and have a lot of parking available. As for industrial properties, they should be located near major roads, and loading docks are a must. Moreover, if the property you are looking at is well-suited for retail, it will have excellent visibility and preferably a lot of foot traffic.
2. Create a network of brokers, bankers, realtors, leasing agents, movers, and attorneys
When you want to flip real estate, you need to find a property that is considerably undervalued. There is no easier way to find such property than by searching for owners who have difficulty paying bills. Cooperation with commercial brokers, attorneys, bankers, leasing agents, and realtors can prove to be a fantastic source of new business leads.
There are lawyers whose primary focus is on helping commercial business owners in trouble. Moreover, banks often own several distressed commercial properties. They are convenient to have by your side as banks are often eager to sell these properties as foreclosure costs are very high. The realtors and leasing agents can be a valuable source of information due to their knowledge of local markets. They can also help you find and secure buyers or tenants.
Cooperating with commercial moving companies is also very useful. When you find a buyer, they will need expert assistance when moving into new premises. They will certainly appreciate a recommendation as relocation is never easy. They can also help relocate the previous tenants. It will speed up the entire process as you can begin with the transformation faster.
3. Know how commercial real estate is valued
While single-family homes are valued using comps, investors use different metrics to determine commercial real estate value: cap rates, gross rent multipliers, and cash-on-cash returns.
You get the cap rates by dividing the property price by its annual net operating income. They will tell you how high your returns will be on a debt-free purchase. It is well worth knowing that they tend to be higher if the property is deemed riskier.
If you divide the sale price of the property by its gross rental income, you will get a gross rent multiplier. You can determine the number of years necessary for the property to pay for itself.
When you divide the property's pre-tax cash flows by invested cash, you will get cash-on-cash returns. This formula accounts for debt, which is a plus. The minus, though, is that it only takes one year's cash flow into account.
4. Consider lease-and-hold instead of flipping commercial real estate
If you purchase a piece of commercial real estate in a recovering market, it may be better to lease it than flip. You must be able to scrutinize every aspect of this investment. In such a market, property values could rise considerably in time, so it may be wise to wait.
Furthermore, if you decide to lease, the remodeling costs could be lower. Commercial tenants, depending on their type of business, will require different properties. For instance, a retail shop and a butcher or a baker will need entirely different layouts. For this reason, you shouldn't make any long-term changes as it will hinder the chances of landing new tenants. So, when you find a tenant, make sure that the lease terms include the remodeling costs necessary to fit their specific needs.
A few final words
As mentioned, if you want to flip commercial real estate, you need to find a considerably undervalued property or be prepared to remodel it, so its value increases enough to make a profit. Therefore, flipping is suitable for those investors who have enough finances to fix the property and then wait for the sale. It's worth noting that selling commercial real estate usually takes longer than selling residential properties. But again, it depends on the market - if you have invested in a slow market, it could take years; in a hot one, your updated property can go quite fast.
To make the right decision, it is necessary to:
evaluate the market
assess the costs required for purchase and repairs and After Repair Value of the commercial real estate
do the due diligence.
Conclusion
It appears that the key to success when flipping commercial real estate is finding the right property. If you are a beginner at this, you will likely find it hard to determine what you should buy and will need help with property analysis. However, with time, you will learn which property types are worth investing in and which you should steer clear of.
Guest Blog Post By lindsay@miamimovingguide.com