Leasing vs. Flipping: Two tactics to use your commercial loan

Learn which strategy is right for you when it comes to using commercial loan proceeds.

Leasing and flipping are two of the most common ways to invest in a piece of commercial real estate. Every investor wants to make money, but an investor who leases commercial real estate intends to earn a steady stream of income.

The investor needs to purchase the property, so both approaches have the same upfront costs. Leasing allows investors to maximize the long-term potential of property with minimal risk. If one tenant leaves, another one should be not hard to find in most cases.Renting out commercial real estate is an ideal strategy in areas where the supply of commercial property is low, and demand is high.When it comes to leasing, additional returns can be earned as property values in the area improve, and rents appreciate.

However before committing to leasing as a strategy consider the commitment of time that is involved. Leases can include complex negotiations, require regular property maintenance and resolution of issues among individual tenants. Professional property management companies can alleviate some of these problems, but the added cost can stifle potential returns.

In contrast, flipping commercial property offers a quick profit and a minimal commitment of time

You can use a commercial loan to flip your investment property, but you should throughly understand the market

Flipping is the opposite of leasing commercial property and involves quickly selling a property for maximum profit. With this strategy purchase a commercial property that is substantially undervalued. The lower a properties initial purchase price, the higher the potential for profit.

But commercial real estate valuations are far more nuanced than residential valuations. Savvy investors should know how renovations on commercial property could impact its value. The wrong type of improvements on a property can restrict potential buyers and detract it’s marketability. For example, by converting a storefront into a restaurant space, buyers will be limited only to those who want to open up a restaurant. But the right type of renovations can significantly improve a properties ability to generate income and therefore substantially increase it’s value.

A thorough understanding of the local commercial real estate market, the types of businesses that are opening nearby and other types of due diligence are needed to flip commercial real estate successfully.

There are obvious risks involved in using a commercial loan to flip commercial property, consider these risks before closing an investment strategy

When it comes to commercial real estate leasing is usually a safer investment strategy. Tenants should not be hard to find if the property is in decent shape and in an ideal location. Depending on the terms of the lease tenants can take on the expense of improving the property themselves.

Flipping commercial real estate entails that an investor takes on the cost of the renovations themselves and any improvements can be costly and could restrict potential buyers. Additionally commercial properties are subject to a longer sales cycle. There is a chance that any renovated property could sit on the market for many months, or in the worst case years.

But as with any investment strategy, the higher risks involved with flipping commercial real estate can also offer greater rewards. Consider the market, understand commercial real estate valuations and perform the necessary due diligence when choosing whether to lease or flip a commercial property.

In summary, leasing is a good bet when property values are steadily increasing, while flipping is best in cases where a low-cost renovation can immediately raise a properties value.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

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 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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