The US property market has hit stormy waters, but investors who know how to navigate these challenging conditions are finding that flipping commercial real estate (CRE) can still lead to big profits.
Despite a cautious outlook from JP Morgan Chase at the turn of the year, some areas of the CRE market are holding up well.
Multifamily vacancies dipped to 4.4% at the end of 2022, a five-year low; the increase in e-commerce has pushed up demand for warehouse space; and rent growth for office buildings continues to boom in several regions.
Investors that know how to flip commercial real estate can still make big bucks if they know how to uncover and seize opportunities that aren’t obvious to the casual observer. To be successful they must know how to:
All this may not come naturally to those new to commercial real estate, or even someone who’s “been around the block” a few times (pun intended).
But with an investment strategy and a keen eye for returns potential, CRE flippers can thrive in a tough market.
Here’s how.
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Before we delve into specifics of how to make money by flipping commercial real estate, we should first know what kind of profit margin we’re playing with. That way, we can determine if it’s worth going for a CRE bounce ahead of flipping houses or other residential real estate.
Property experts Revolution Realty Capital found that the average return on CRE is 9.5% based on the last decade of S&P 500 Real Estate data, compared to an industry average of 7.8%.
The average return on Real Estate Investment (2014-2023)
We should also factor in that commercial real estate investing typically holds higher income potential due to better rental rates and longer leases than residential properties.
The increased cash flow that these bring makes flipping commercial real estate a tempting proposition, and it’s why many investors continue to mine this rich seam.
There’s a reason why many investors see flipping commercial properties as a game.
With high stakes, strategic moves, and potential for substantial rewards, it tends to unleash our competitive spirit.
But with a few insider tips and a calm head, we can turn this game into a well-oiled strategy for higher returns than we expected.
Warren Buffett once said “the more you learn, the more you earn”, and he would know. This golden rule of investment applies to commercial real estate investing, too.
To flip successfully means to know your industry inside out. This includes having an intimate knowledge of the pros and cons of all types of property (whether it’s flipping office buildings, single-family homes, or commercial property) and knowing which holds the best ‘flip potential’ at any given moment.
It means keeping your fingers on the pulse with the latest commercial property trends, too. As an investor, you should make it a habit to read industry reports, attend real estate conferences and webinars, and keep track of rival purchases — all of these will help build up your knowledge like compound interest.
Knowledge like this is crucial when it comes to spotting emerging US markets, which is why clued-up investors are the ones primed to pounce when the next CRE craze comes along.
There are several other actions you can take that are designed to put you ahead of the game.
Economic development agencies often have invaluable insights into growth plans and infrastructure projects that big businesses are spearheading in local markets.
Data analysis tools also help you stick a finger in the air and detect favorable market conditions. You might look for population growth trends, job markets, and median incomes to spot these up-and-coming areas.
Also, keep track of tech and innovation hubs, which can be catalysts for emerging CRE markets. Often, these enterprises know where tomorrow’s startups are going to move to and these may attract professionals that contribute to an improving area.
Another form of knowledge is knowing the right people.
Like in any other business, networking is crucial.
Some CRE investors even know lenders that own distressed properties and need to sell to avoid the sky-high costs of foreclosing! Often they find these through real estate agents who include them in a wholesaling package for investors to take advantage of.
A strong network provides access to valuable insights, off-market deals, and reliable partners who can assist you throughout the flipping process.
Let’s face it: if you didn’t have an eye for spotting potential returns, you wouldn’t be in the property flipping market.
In the world of CRE investment, spotting that underused space in an office building or predicting the next ‘boom’ neighborhood can give you that invaluable competitive edge.
But, like with anything in life, there’s always more to learn. As well as academic studying, take the time to visit as many properties as possible (even if you don’t plan to make a bid), pick out the upgrades they need, and try to predict how much they sell for.
Later, find out the true sale price and work out how much the investor made from the deal.
This practical experience will act as a kind of training for when you’re in the buyer’s shoes and looking to make money from a flip.
If we view commercial real estate flipping as a game, then the very best investors are a lot like chess players in that they get into the minds of their opponent – or in the case of CRE, the buyer or real estate agent.
To do this, you must know the metrics that determine commercial property values. This may include the cap rate – what you get when you divide the purchase price by the annual net operating income – the gross rental income, or the cash-on-cash return.
With this info, you’ll be in a great position to predict what the property will value when you put it back on the market – and whether it’s worth your time buying this type of investment property.
Flipping commercial real estate doesn’t have to be about speed.
Sometimes it makes sense to buy the right property now, then hold onto it to wait for a rise in value or to assess it thoroughly. As successful property investor T. Harv Eker once said, “Don’t wait to buy real estate, buy real estate and wait”.
You may decide that leasing is a better short-term option, especially if you improve your cash flow through rental returns.
Buy-and-hold, too, may make sense if it gives you more time to renovate and remodel the property into a more marketable condition.
Having this flexibility can be vital when it comes to maximizing your flip profit.
If you’ve flipped a commercial property before then you’ll know that time is of the essence when it comes to closing a sweet deal.
The thing is, traditional loan providers are notorious for dragging their feet when approving financing. They’ll want bank statements, business plans, or that all-important 800 credit score – all roadblocks that eat up time when all you want to do is close the deal.
Luckily there are forms of lending that are designed to finance agile short-term deals.
Hard money lending, for example, is an expedited financing option that provides fast finance secured by the property itself. This features a higher interest rate and less borrower
protection, but it can be very useful for those with the know-how to turn this capital into profitable deals.
Sometimes property financing doesn’t end with capital financing like mortgages.
You may also need to provide earnest money, otherwise known as a soft deposit, to prove your interest and secure a deal. In some states, earnest money is an obligatory payment that can cause all kinds of problems if not paid.
Often, CRE investors struggle to find this on top of their regular financing, but new digital financing services are already making this a reality.
This is called LLC-based funding. In a nutshell, the lender stumps up the earnest money for a deal in less than 48 hours. They structure the deal using an LLC (Limited Liability Company) which limits your liability, then you have the option to close the deal if you choose, or walk away.
In a real estate market where short-term loan options are hard to come by, many CRE investors are turning to Duckfund, an LLC-based funding provider that supplies flexible and affordable earnest money in as little as 24 hours.
Investors find that they don’t need to dip into their funds, which enables them to work on multiple deals, or multiple flips, at once.
Ready to find out how LLC-based funding can help you nail down that hot property? Sign up to Duckfund now and get access to the flexible and affordable finance that will accelerate your CRE portfolio.
