Commercial Real Estate Investing: Lease or Flip?
Commercial real estate is an excellent investment option with a number of tax advantages and tremendous versatility, allowing you to purchase anything from raw land to a fast food franchise and to be as hands-on as you would like in the management process.
You also have some versatility in how you capitalize on your investment. Should you opt for cash flow payments by leasing your commercial real estate holding, or is it better to make improvements and “flip” the property soon after the initial purchase? This post examines the benefits and disadvantages of each position.
The Leasing Option
The purpose of leasing is to maintain positive cash flow while waiting for capital in the property to appreciate. It is the long waiting game for building wealth through real estate acquisition. Thanks to Section 1031 of the tax code, you can defer paying capital gains taxes indefinitely while at the same time diversifying your investment portfolio.
When you choose to lease, you need to consider not only how active a role you’ll choose to maintain in the management of the property—weighing the time commitment against the cost of hiring a property manager—but also where to buy. Location is the most important factor in long-term commercial real estate investment. Outside prime markets like Los Angeles and San Francisco, investors should seek areas with high demand and limited potential for new zoning or construction.
Flip and Be Done with It
The principle behind flipping a commercial real estate property is similar to that of flipping a residential property: Purchase something undervalued or distressed, then make improvements in order to resell at a higher price. Developing raw land for commercial use and selling the finished product is another version of flipping a commercial asset.
In order to realize the highest potential for success, you need to understand the value of commercial real estate in your location, and it helps to have industry knowledge. People who understand the demand for medical office space in their target area know what improvements are most likely to boost the appeal of a property. Sometimes improvements do not need to be substantial in order to improve resale value. Investors without knowledge of what drives demand may lose money because they overspend on unimportant areas.
Because developing commercial real estate to flip it relies on quick resale, it is also important to determine whether you will be able to complete the construction needed within a timeframe that allows you to turn a profit.
Some Final Observations
Whether you lease or flip largely depends on market conditions. Most analysts view 2017 as a solid year to purchase commercial real estate in the United States, citing continued international interest in U.S. properties, but they caution that new trade agreements could hamper demand, one of the main causes of market growth. Moreover, new construction in the non-residential sector is predicted to be sluggish due to the ongoing labor shortage and a slow-down in the global commodities market.
A proud member of the Peak Corporate Network, Peak Commercial brings an unmatched level of expertise and investor resources to your search for the perfect commercial real estate investment. The company provides unique insights, including cutting-edge technology and direct access to Peak Corporate Network’s financing, insurance, escrow, and 1031 Exchange services, to help you narrow down your search for the right property type and location.