Short Term Income—To Flip Or Not to Flip?
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Looking to Flip?
Greetings from the metropolis of Cedar Crest, NM.
It is a cool 70 degrees in the mountains of New Mexico with more rain in the forecast. I can’t complain.
Today…as I am shuffling through commercial real estate properties on the market….I am seeing several single-tenant properties that are credit tenants selling at high cap rates. A sign of the times for sure.
When there is a flood of properties on the market, even in residential real estate, I tend to shy away from flips unless I am picking things up a pennies on the dollar…but even then….my due diligence skills need to be very sharp. But even then, in a market like this….I like to pick up cash-flowing assets at “vulture” prices. So…on to today’s topic….To Flip or Not to Flip?
The Flip
The process of flipping commercial real estate involves purchasing a property, upgrading or enhancing the property and selling 
it quickly for a higher price than originally purchased. The residential flipping market gained momentum throughout the late eighties and nineties, with the bubble bursting in the earlier part of this decade. However, the commercial real estate flipping market has survived the economic downturn and is still a profitable way to earn short-term income when you have access to capital.
How Do I Begin Flipping Commercial Real Estate?
Becoming a “flipper” requires that you do your research. Understand that it may take as long as 36 months to see a profit. Before you begin looking at properties, make sure you have access to capital. This means that you may need to consider alternate financing vehicles. Talk to many lenders to find the right financing products for your needs. Remember, you are going to have to pay for the initial purchase, repairs and upgrades, maintenance and the expenses of the property up to the point of sale. This is a time to over budget, not under budget.
Once you have financing options determined, it is time to scout for potential properties. As with all investments, make sure the properties you are considering buying are going to be income-producing assets. Business transactions and real estate
investing require a profit-focused mentality. When looking at properties, leave your emotions at home. Just because something looks pretty or “fits into a neighborhood” does not mean that it will generate the maximum income. Instead, when you are scouting out properties, look at the market comps. This means that you need to look at other similar properties in the market. Some questions to ask are:
1. Will your potential property need too much or too little renovation to make you money when you sell it?
2. What renovations actually need to be done?
3. Is the market flooded with similar properties?
4. How long has the property been on the market? Why?
5. What makes this property worth the risk?
I Purchased My First Property. Now What?
Set a timetable. Realistically decide when you want to get the property back on the market. Ideally, this should be as soon as possible. The longer you have to pay for the maintenance expenses, the less your profit will be.
Before the closing, you will have an inspector’s report of all the repairs you need to complete. If you did not negotiate for the previous owner to complete them, then you will have to finance those repairs. When you did your research and looked at the market comps, you got a good idea of what other properties look like. Compile a list of costs it will take to get your property t
o look like market comps or better.
Once you have your list of repairs and upgrades, interview contractors. Find the best deal for you. Make sure to really examine the bids and timetables. And, remember, construction and repairs usually take longer and cost more than originally budgeted for. This is a great time to build clauses into your contracts that fine the contractors for delays or improper work.
Once your repairs and upgrades are complete, it’s time to list your property. You can opt to sell by owner, but understand that this may take longer before you find a buyer. The longer you spend on the market, the slimmer your profit margin will be. Find an agent who will work with you. The agent should be well versed in selling quickly. Congrats! You’re well on your way to your first flipped property!
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