While we are bombarded with reality TV shows about flipping residential properties, you hardly ever hear about flipping commercial real estate. While not complicated, this kind of investment is drastically different from residential flips and carries with it a new set of concerns. However, as an investor you need to be knowledgeable about flipping commercial property to be able to take advantage of a god deal when it comes your way.
First of all, we must discuss the differences between residential and commercial real estate valuations. Residential properties are priced based on their physical attributes and compared to other houses in the area that have recently been sold or listed. For example, a 4 bed, 3 bath, 2500 sqft house in XYZ neighborhood is worth $200,000 because a similar house up the street recently sold for $195,000.
On the other hand, commercial real estate like office buildings or multi family residences for example are valued based on how much money they make. Their cash flow is the ultimate determinant of their value, not comparable sales.
Like residential flipping, the key to flipping commercial real estate is getting a good deal going in. The bigger the discount on the property, the better the deal. Look for motivated sellers, properties that have not been upgraded in a long time or commercial real estate in an area "on the rise". By doing a little research on the sellers, property and neighborhood you can root out a deal and get in at a good price.
In order to profit from flipping commercial real estate you must increase the income the property makes. Like residential flipping, one way to do that is improve the way the property looks. A nicer property attracts better, higher paying tenants. Unlike residential flipping, you can look for ways to decrease costs as well to increase incomes.
Your net income is simply the money you make minus the money you spend. If you can find a way to decrease your maintenance costs or pass other costs onto the tenants while simultaneously improving the property you have a win-win situation on your hands.
This is what makes commercial real estate so great; you can tweak the income of your property and increase its price. After buying, fixing up and increasing the income for the property you can turn around and sell it. Even if the market turns cold and buyers are scarce you have a monthly money maker on your hands.