If you took out a commercial loan to flip a commercial property you need to know how to value commercial real estate and plan your project around the duration of your loan.
Flipping a commercial property offers the potential for higher returns, as commercial real estate usually has a higher value per square foot. Compared to residential deals, commercial real estate negotiations are often more flexible, which gives each deal greater profit potential.
When it comes to flipping the commercial real estate the market is far less competitive. In most markets, Single-family homes that were once significantly undervalued have usually already been renovated and resold.In many areas, there is an abundant supply of distressed commercial properties in need of restoration.
However not every commercial property should be renovated and sold off immediately. Depending on market conditions a wise investor should consider whether leasing their property is a better strategy. If there a chance real estate prices in the area could appreciate substantially over an extended period, it may better to lease and hold onto the property.
The risk when it comes to flipping commercial real estate is that renovations can be costly and may not suit the needs of every potential buyer. Leasing avoids this risk as tenants can usually improve the property themselves to suit the needs of their businesses.
Before using a commercial loan to flip your property, you need to know how to value commercial real estate
Commercial property is almost never valued based on comparable sales. Commercial valuations can be specialized and require a great deal of expertise and are based on cap rates, gross rent multipliers and cash on cash returns .
The cap rate is the purchase price divided by the net operating income of a property and describes the potential return on an investment without accounting for any debt resulting from the initial purchase. To calculate the gross rent multiplier, divide the properties sale price by its rental income at full occupancy, this will indicate the earning potential of a property over time. To calculate cash on cash returns divide the total down payment on a property by its annual pre-tax cash flow, which will account for the debt involved in purchasing the property up front.
Knowing these factors will help any investor understand how to maximize the sale price of a commercial property, which is the primary goal of the flipping process.
Commercial loan terms are different, and your renovation project should match the duration of your loan
Commercial lenders have to abide by fewer regulations, which means financing may be easier to secure. Investors should be aware of the how terms of commercial mortgages can differ from residential ones.
Commercial mortgages are usually short-term loans structured around balloon payments. Before taking out a commercial mortgage have plans in place to either sell the property or refinance it before the final payment is due.
Every commercial flipper should consider the shorter lifespan of commercial mortgages in the context of the longer sales cycle involved with commercial real estate. Expect industrial properties to sell within six months, office properties to sell within 8 and retail space to sell within 12.These numbers could change depending on the demand for commercial real estate in the area.
Plan ahead before financing a renovation project. Ensure a projected completed and resold before any loan matures and expect any commercial property to remain on the market for a longer time.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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