Five Tips to Help You Get Started
Across the country, people are getting into the fix-and-flip trend in residential real estate. Pick up a distressed or outdated property at a reduced price, invest in some upgrades and sell it for a profit. The formula is pretty straightforward and let’s be real; Chip and Joanna Gaines have taught us all how to renovate a property on a budget!
But did you know commercial real estate is becoming increasingly popular with fix-and-flip investors? It is and the reason is simple; the potential for bigger profits and higher returns per deal. Compared to residential properties, the commercial arena also has less competition because of a smaller pool of potential purchasers. Don’t let that scare you though. Commercial buyers have more negotiating power, which may translate into enhanced flipping profits.
If less competition and the potential for greater profits sound appealing to you, we should talk. We’re Julia Barth and Aaron Siddique, founders of Residential to Commercial Academy. Here are our tips for flipping commercial properties:
- Network, Network, Network!
- Understand Different Property Types
- Commercial Properties are Valued Differently than Residential
- Loan Terms are Different in Commercial Real Estate
- Invest in Educating Yourself to Excel in Commercial Real Estate
Network, Network, Network!
(with commercial brokers, bankers, leasing agents, realtors and attorneys)
A simple way to find commercial real estate bargains is to seek out commercial property owners who are struggling to pay their bills. Some real estate attorneys specialize in helping owners of distressed commercial properties and networking with these professionals can be a great source for business leads.
Another potential source for leads is banks that own distressed commercial properties. Banks are usually eager to sell and thus avoid the high costs of foreclosure (i.e. legal, commercial brokerage and property maintenance fees). Other deal sources include commercial realtors, brokers and even leasing agents. These people know their local commercial property markets and can help you connect with potential tenants and buyers.
Understand the Different Property Types
Pro Tip: local supply and demand determine commercial property values and rental rates. Areas that have few commercial properties available and high demand for space usually equate to rising values and high rental rates. The ideal scenario is this: a commercial property located in an area where vacancy is low and space available for new development is limited.
Commercial real estate is an umbrella term for office, industrial, retail, multi-unit apartment and mixed-use properties. Office properties should be centrally located with plenty of parking.
Industrial buildings should be sited near major roads and have large, well-maintained loading docks. Retail properties should have good visibility and, in the case of strip centers or regional malls, plenty of potential foot traffic.
Commercial Properties are Valued Differently than Residential
Commercial properties are sometimes valued using the comparables method. However, unlike in residential, commercial properties are often valued based on a few important factors: cap rates, gross rent multipliers and cash-on-cash returns. In other words: profitability.
Cap rates are calculated by dividing the property’s price by its net operating income. For example, the cap rate on a $1 million property generating $100,000 of annual income is 10%. Cap rates measure investor returns on a debt-free purchase and tend to be higher for riskier properties.
Gross rent multiplier is measured by dividing the property’s sale price by its gross rental income. This formula is sometimes used to screen for properties that are bargain-priced relative to their earnings power.
Cash-on-cash returns are figured by dividing the property’s pre-tax cash flows by invested cash. For example, a property generating $50,000 in cash flow and purchased for $1.0 million ($800,000 debt plus $200,000 equity) has a 25% cash-on-cash return ((50,000/200,000 = 25%).
If all these terms and formulas seem confusing, no worries. We can teach you everything you need to know in our online academy.
Loan Terms are Different in Commercial Real Estate
Financing a commercial property can be easier than financing a home and that’s good news for those looking to expand into commercial real estate. Lenders often have more flexibility due to fewer regulatory constraints.
But, commercial property loans tend to have shorter terms (5 to 20 years) and balloon payments due at the five or ten-year mark, so it’s wise to plan ahead!
Invest in Educating Yourself to Excel in Commercial Real Estate
You can literally revolutionize your career by breaking into commercial real estate. Don’t know where to start? Check out our online academy, Residential to Commercial Academy! If you’re a residential real estate agent, you already have the licensing you need to start selling commercial real estate. Our online course will give you the tools you need to succeed! If you’re a house flipper looking to try your hand at flipping a commercial property, this six-hour course will teach you what you need to know. Our course will give you all the nuggets you need to make sure every property that you buy, sell, hold or invest in is lucrative and successful. We can’t wait to hear from you!