You’ve probably used hard money to flip residential properties. You secure an undervalued home, pouring months of blood sweat and tears into your project and then you resell it at a higher value. Residential flips take a lot of work because you can only add value, by improving or adding amenities. But flipping commercial properties is different. If you can raise rents on a commercial property, you can increase its resale value without doing any rehab.
Commercial buyers don’t care about bathroom fixtures or paint colors; the one thing they care about is income. Consider how commercial properties are valued based on cap rate, where:
• property value= income/cap rate
So, if you can boost the revenue generated by a commercial property, then you can resell it for a higher value, and this might not take any rehab. If you don’t believe such a thing is possible, consider the following examples of rehab free commercial flips:
• Raising rent’s rehab free: Say there’s a ten unit apartment building where the monthly rent is 750 dollars, for simplicities sake let’s assume a cap rate of 10 percent:
• 90,000 income/10% cap rate= the value of the property is 900,000 dollars. But let’s say average rents in the area are 800 dollars, raising rents by a mere fifty dollars will allow you to earn a profit without doing any rehab work:
• 96,000 income/10% cap rate= resale value of 960,000 dollars. So, in this case, you’d earn 60,000 dollars without even lifting a finger.
• Adding tenants rehab free: let’s assume that same ten unit apartment building is only half occupied, the rents and the cap rate are the same:750 dollars a month and 10 percent:
• 45,000 income/10% cap rate= property value of 450,000.Let’s say the recent expansion of the university affords you the chance to bring in well even two extra tenants on board, under a four-year lease:
• 63,000 income/10% cap rate= resale value of 630,000 dollars. Once again without all the blood sweat and tears of a renovation, you’ve earned 130 K in income.
Given the above examples, you should use hard money financing to scout out locations in up and coming areas that are suffering from low occupancy, or find properties where rents are well below the average for the neighborhood.
The above examples are relatively conservative. Because, in reality, you might need to do rehab some work to justify rent increases or to attract new tenants. Nevertheless, given the way commercial properties are valued, it is possible to flip commercial properties without the fix.
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Dennis Dahlberg Broker/RI/CEO
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.