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Commercial Property: Flipping vs Long-term Holdings

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Commercial property investment is a lucrative corner of the marketplace for investors, with companies and businesses almost always in need of premises from which they can run their day-to-day operations, from customer-facing storefronts to manufacturing warehouses. To be honest, it’s a shrewd move for investors anew. However, commercial real estate investment has two avenues that are particularly popular, which investors always have to consider before taking the plunge: long-term leasing properties or renovating and flipping properties. The team at Acumen Finance is going to talk you through the pros and cons of both avenues, to better your understanding of the status quo. 

The Basics

When you jump into the commercial property investment arena, you’re throwing yourself into a risky, not wholly-stable area of the economy that can see you sitting on a golden throne or amongst a pile of cindered bank-notes. It’s high-risk, high-reward with a myriad of short and long-term investment strategies that, if an investor plays his (or her) cards right, will guarantee a few pennies in return. 

There are quite a few differences between long-term leasing and flipping commercial property. However, the major one is the out of pocket costs ─ the additional investments and expenses for renovation and maintenance, and the eventual recuperation of that money. 

So, a key factor in any successful commercial property is the location. If your property is in a good location with decent transport links, upcoming infrastructure development, and a budding population, you’ll attract plenty of potential tenants. If the economy is in the right place and you’re in a prime location, your position in the marketplace will boon and, without a doubt, the lease and sale price potential of your property will rise like a phoenix from the flames. 

But, do you want fast, hard cash, or do you want to create a nest egg that’ll collect consistent sums of money, hopefully growing more lucrative as the years pass by, deepening your pockets and bettering your the trajectory of your commercial property investment journey? This is where flipping and long-term holdings come in to play. 

Flipping Commercial Property

If you haven’t heard of ‘flipping’ before, it’s a very simple concept to get your head around: buy cheap, sell high - or, at least, at a profitable margin. When it comes to the commercial property space, you’ll need to find a property that is considerably undervalued or in desperate need of a remodel that can drastically increase its value to a figure that covers any investment costs. It’s just like buying, renovating, and selling houses in the residential markets ─ as in, give it a lick of paint, get out, sell it for profit, rinse and repeat. 

So, flipping is for the kind of investor who has the cash available to invest in and renovate a property and then keep themselves afloat with their money tied up in a static property, whilst waiting for the commercial property climate or economic factors to allow for a sale. Commercial property tends to take longer to sell than its residential equivalent, ranging from years in a slow market climate to fairly fast at times when the market is hot and property is in demand.

Tips and Tricks

Before making any investments, you should commit time to market research and due diligence to ensure that you don’t make a mistake, and when it comes to investing in a commercial property to flip, investors should look to the local market climate ─ specifically that of the value of homes in the area. Look into the local area, economy, and the seemingly menial community factors like quality of schools, public transport accessibility, local demographics and their spending habits, and you’ll be able to figure out how ‘in-demand’ your property would be for potential tenants. 

It’s also important that investors look into the overall costs and value of a commercial property before jumping in at the deep end. You should always look at the property and consider the cost of any potential renovations so that you can estimate the overall cost of the investment before contrasting it with the estimated After Repair Value (ARV) of the property. This will establish a realistic potential-profit margin, which you can use to make your final decision. 

The renovations don’t have to be massive ─ so, don’t think that we’re suggesting that a flip-investment will be a tonne of work in a short space of time. Small improvements to commercial property which better the aesthetic image or the functionality of a building can give a huge boost to the resale value. That said, keep in mind that commercial properties can benefit or suffer from the seemingly smallest of features that make it just ‘right’ or ‘wrong’ for potential tenants; always give due diligence to the property market and neglect no details when looking at properties to flip. 

Some Flipping Considerations:

Here’s a little list of things to keep in mind if you’re going to start flipping commercial property to build up your investment portfolio. 

Now, the loan-to-cost ratio varies from lender to lender, and most conventional lenders max out at 80 to 85%. So, if you need $200,000 for a project, you can expect a bank to approve only $160,000 to $170,000 - the balance is up to you. If you need the full 100%, there are options available, such as mezzanine financing, bridging loans, or even a private lender who may be willing to go all the way with you.
  • Get to know the right people: bankers, leasing agents, brokers, and people in all of the relevant industries that you’ll need to use. 
  • Make sure that you understand the markets, the rules and regulations around commercial investment, and all of the property types that are available to you. 
  • Distinguish the key market indicators that would suggest you should lease instead of flip commercial property. And, learn how to value a commercial property correctly ─ it’s not the same way that residential ones are valued.
  • Prepare yourself for longer periods of stagnation, but higher returns per project, and make sure that you understand the differences between commercial and residential property loans. 

Leasing Commercial Property

Alright, so, on the other avenue, we have the long-term holding, leasing side of the commercial property market ─ buying a commercial property with the intention of leasing it out to tenants over a longer period of time, recouping and eventually profiting through monthly rental returns for the duration. The first consideration an investor should always make is the long-term potential of the commercial property that they are looking at investing in ─ if it’s in a stagnant location, it’s most likely a no-no, but if it’s in an up-and-coming area, you may find that there’s potential for the monthly rental return to increase substantially as the surrounding infrastructure develops.

With the potential increase in mind, savvy investors often ignore the fact that the rental yield may only just exceed the mortgage on commercial properties, betting that the future value will far outweigh the lesser-gains of the present day. And, if it doesn’t increase exponentially, the chosen property could still be an excellent long-term investment courtesy of sale-value appreciation and any potential tax deductions that it may incur. 

As we’ve already mentioned, when investing in commercial property for the sake of long-term leasing, an investor should always consider the supply and demand in the local area and economy. There tends to be a standard correlation which reveals that the lesser the supply and demand, the lower rental costs, and the higher the rate of appreciation.

Where flipping can result in a huge loss of capital if the Australian commercial property climate falls through, courtesy of mismanagement by the Big Four, leasing property can mitigate some of that risk. For an investor, leasing commercial property on long-term agreements is an excellent way to generate a consistent cash flow, and provide a relative safety-net against potential crashes or tenant financial fallout. Let’s say, for example, you choose to invest in a multi-family commercial property, and you have five separate tenants housed within its walls, and one tenant’s business collapses… you’ve still got four more putting money in your pocket. If you had invested in residential property and the tenant ran out of money, you’d lose your entire income, not just one-fifth of it. 

Some Leasing Considerations: 

Well, just like all forms of investment, there’s a degree of risk, and it can go from ‘grandiose’ to ‘ghetto’ pretty quick. So, here are some things to think about to ensure that your commercial property investment efforts are reminiscent of a sweetly-angled dive, rather than a belly-flop into the deep end.

- Investing in commercial property is a timely affair - even flipping can be, when put into perspective. You’ll need to figure out whether you can deal with the property yourself or if you’ll need to employ a property manager to take care of your growing investment portfolio - as an added expense. This will alleviate the personal time consumption, but your outgoings will be exponentially increased, and your profits drastically decreased. 

- Commercial property investment can be considerably more complex than residential ones, and they pack higher upfront costs and various agreements - contractual and permitting - that you wouldn’t normally have to deal with. 

We’ll wrap this up here, but we’d like to leave you with one last piece of parting guidance: If you’re going to start investing in commercial property, whether it’s through a flipping or leasing strategy, you need to make sure that you understand all of the processes, which we have covered for your perusal online. But, above all, know that while either strategy can be very lucrative and a great addition to any investor’s portfolio, you should never overstretch yourself and you should always invest not only money but also your time to individual commercial properties, to ensure that they become profitable. 

If you need any further guidance with flipping or long-term leasing, or if you’re in need of a middle-man who can hook you up with some much-needed commercial property finance to kick-off your foray into the commercial real estate markets, get in touch with Acumen Finance, today. Our team of industry experts has got all the know-how and, if you’re in need of financial assistance, can access an incredible pool of Tier-2 and Tier-3 private lenders who are more than willing to assist new investors in starting their journey.