The Value-Add Playbook: Flipping Commercial Property – Yield on Cost
When most people hear “flipping,” they think of residential TV shows—a fast-forward montage of new paint, granite countertops, and a quick sale based on neighborhood comps. In commercial real estate, “flipping” is a different sport entirely.
You can’t “flip” a 50,000-square-foot industrial building with fresh paint. The value isn’t based on emotion or comparable sales; it’s based on math.
A commercial property’s value is a direct function of its Net Operating Income (NOI). The formula is simple: Value = NOI / Cap Rate.
Therefore, to “flip” a commercial property (what we call a “value-add” play), you have only two options:
- Decrease the market cap rate (mostly out of your control, as it’s set by the market).
- Increase the Net Operating Income (entirely within your control).
This is where the real work is. It’s not about cosmetics; it’s about executing a business plan to fill vacancies, increase rents, or cut bloated expenses. And the single most important metric for this strategy is Yield on Cost.
What Is Yield on Cost (YoC)?
Yield on Cost is the metric that measures the success of your entire value-add project.
It’s your future, stabilized Net Operating Income divided by your total project cost.
- Stabilized NOI: This is the potential NOI you will achieve after your business plan is complete (e.g., the building is 95% leased at new, higher market rents).
- Total Project Cost: This isn’t just the purchase price. It’s everything you spend:
- Purchase Price
- Renovation & Capex Costs
- Tenant Improvement (TI) Allowances
- Leasing Commissions
- Carrying Costs (interest, taxes, etc. during the repositioning)
The formula is: Yield on Cost = Stabilized NOI / Total Project Cost
This single number tells you the true return on all the capital you invested in the deal.
The “Spread”: Where Profit is Manufactured
Here is where the “flip” profit is created. Your goal as a value-add investor is to create a significant spread between your Yield on Cost and the market cap rate.
The market cap rate is the price investors are willing to pay for a stabilized, low-risk asset.
Your Yield on Cost is the return you created by taking on risk (construction, vacancy, market uncertainty).
The difference between them is your profit margin.
Let’s use an example:
- You find a vacant retail center you can buy and renovate for a Total Project Cost of $2,000,000.
- After 18 months of work, you lease it up, achieving a Stabilized NOI of $160,000.
- Your Yield on Cost is $160,000 / $2,000,000 = 8.0%.
Now, you take this stabilized building to the market. Buyers for a fully-leased, safe asset like this are happy to pay a 6.0% Cap Rate.
- New Value = $160,000 NOI / 6.0% Cap Rate = $2,666,667
- Your Cost = $2,000,000
- Your “Flip” Profit = $666,667
You manufactured over $660k in equity. That 2.0% “spread” (8.0% YoC vs. 6.0% Market Cap) is your reward for the risk and work of transforming an empty building into a stable, income-producing asset.
The Real Work of a Commercial “Flip”
This profit isn’t a quick hit. A residential flip might take 3 months. A commercial value-add project takes 18-36 months.
The “work” isn’t painting; it’s negotiating leases, managing construction, navigating zoning, and underwriting tenant credit. You are taking a high-risk, non-performing asset and absorbing that risk until it is a low-risk, performing one.
In commercial real estate, you don’t find value; you create it. Yield on Cost is simply the “report card” that shows you how well you did.
Have a Value Add Deal For Sale? Here’s our Buy Box:
- Industrial & Commercial Property, 10K sq. ft. – 250K sq. ft.
- Mobile Home Communities (50 pad minimum)
- Well located Retail Development Sites
- Residential MFR & SFR
- Ideally long term rented asset with below market rents
Recent Portfolio Exit Volume
- 2021 $54,615,000
- 2022 $54,547,000
- 2023 $57,489,000
- 2024 $52,164,000
- 2025 YTD $49,233,000