Q and A: Brian Fielding Discusses Short-Term Financing and “Flipping” Assets

Hello Mr. F.

My wife and I have been doing some diligence on commercial real estate investment and found one site online that suggested that most investors buy net leased properties with short term financing and then “flip” those assets as the loan matures. We have really enjoyed reading your stories and blog and see no reference to that sort of investing. Is there a reason you haven’t written about this sort of investment strategy? I hope you can answer our question … we are getting very excited about venturing into real estate investing.

Mr. and Mrs. Robert S – Biloxi, Miss.


Dear Mr. and Mrs. S,

Your question is one that has been coming across my desk very recently and I appreciate your writing me.

There are persons who make money in a great many ways and there certainly are those persons who can “time a market” … buying low and selling high, but for every success we believe there is a less spoken story of failure. That is not to suggest that buying an investment with a relatively short term mortgage is a bad practice, but we avoid doing so because there are too many variables that would concern us in a relatively short “hold” of an investment.

First there is the obvious … the concern that the property that pretty much needs to be sold could hit the market at the wrong time. In the past ten years we have seen some dramatic shifts in the economy in general and in some cases to an even greater extent in the commercial real estate pricing. If you are lucky, or perhaps really prescient, you might buy a property at its nadir and sell at the height of the market. But if you time it incorrectly, you could face a severe economic loss – forced to sell a few months or years before the market fully rebounds.

The second is a tad less obvious, but of equal concern. With lenders currently required to pay out almost nothing on savings deposits, they are currently motivated to lend at remarkably low rates. But if the economy continues to rebound and the Fed starts to tighten money supply, the rate to refinance a new mortgage can rise sharply and whether it is you, or your potential buyer, that will need financing, the full cost to own your investment will be substantially higher. The net return you [or the acquirer] is often net of mortgage costs, so if rates move higher, the net income will be reduced [or disappear entirely].

In short, we believe in a strategy of acquiring solid properties with longer term leases and finance our holdings for long term appreciation, not for sale within a shorter timeframe. It does work well for some, but we feel it to be higher risk than we would want to suggest for the new investor.

Hope this helps.

Best Regards,

Brian F.

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Q and A: Capitalization Rates and Property Investment Discussed by Brian Fielding

Dear Mr. F.

Everything that I read about buying and owning commercial real estate references “Cap Rate.” What is “cap rate” and what is its importance to the investor?


Dear Dean,

Thanks for writing me and for authoring such a good question. The actual term is capitalization rate but mostly everyone uses the abbreviation. It is a standardized valuation method using the ratio of Net income to selling price. By way of example, consider an investment that is netting [after all expenses] $10,000 and is available for sale at $200,000. A prospective investor would calculate the property by dividing the net return [$20,000] by the sales price [$200,000] and compute that the prospective cap rate is 5%!

Cap rate is a simple tool to measure return and to compare properties against each other. Generally the difference in cap rate between similar properties will be explained by differing inherent risk of the tenancies and the term remaining on the underlying leases.

As an investor, you can use Cap Rate to compare your intended acquisition to others that have occurred in that market. You can also follow trends within that marketplace, perhaps giving you a sense of where investment properties are headed in the future.

A quick warning, however … cap rate is best when used for comparing consistent cash flow and is thus highly emphasized in offerings such as net leased investments and rarely used where rents fluctuate greatly and there is a high risk for tenant turnover.

I hope this helps get you started. Please let us know how your efforts to become financially independent progress.


Brian Fielding

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