It has become an adage in modern life that real estate can be a smart investment for those looking for a bit of additional income. When looking for a property in which to invest, those who are new to this world often opt for a single-family rental. Though this choice may be a familiar one, and may, therefore, seem like the logical first step for an investor, it may not always be the smartest or most lucrative option available. Christopher Linkas, a professional real estate investor, sat down with us and explained why many investors would be better served by putting their money towards commercial real estate in lieu of the purchase and operation of a single-family rental. Read on for a look at his recommendations in this often confusing field.
The advice given by Christopher Linkas is rooted in a long career in many aspects of investment. Currently, he is serving as a European head of credit, which is a role he has been in since November of 2012. The team he leads is a twenty-person group made of individuals focused on opportunistic principle investments in areas of the UK and throughout Europe. Though he is currently based in London, his areas of operation range from the United Kingdom, to Switzerland, and to Germany.
Linkas and his team look to a variety of investment areas for potential profit. Though one large focus of theirs is real estate, they are also involved in investments concerning shipping, renewables, non-performing loans, securities, and corporate loans. He previously worked for a real estate funds and credit business operating out of New York. There he led efforts focused on opportunistic debts and real estate investments throughout the continent.
Potential Problems of Single-Family Units
Though much of Christopher’s advice is centered on the benefits of investing in commercial real estate, it will be helpful to take a moment to examine some of the difficulties associated with single-family rentals. One major issue that operators tend to run into is the binary nature of occupancy in these units. Obviously, if there is a vacancy in a unit that can only house one family, occupancy has dropped from 100% down to 0%. If a new tenant cannot be found in a timely manner, annual income for the property will be severely depressed. By having the income-generating component of the property operating in such extremes, investors open themselves up to drastic fluctuations in their bottom line.
Another potential pitfall of single-family rentals is that investors are often the sole owner and are therefore faced with the question of operating the unit on their own. In these cases, the owner can either opt to self-operate, which requires a significant investment of time, or opt to hire an outside manager, which requires a monetary cost that can be upwards of 10% of the unit’s income. In either scenario, the owner is incurring a significant cost that will negatively impact whatever value they hope to realize from the property.
Experience as a Beginner
Though much of the advice given by Christopher Linkas stems from his long career and wealth of experience in the field of real estate, he is also able to advise first-time investors from the point of view of someone who knows how difficult it can be to get one’s start in investment. When he graduated Bowdoin College in 1991, he found himself directly in the middle of a severe economic downtown. The experience of searching for, and eventually securing work, in the field of finance during a recession was a great crash course that did not afford the luxury of investing in suboptimal properties. Stemming from that time, he carries with him a firm conviction that first-time investors are best served by seeking the most value from their investments, as this is the surest path to financial solvency.
Commercial Property Investment
As many potential downsides as there are to single-family rental investment, they are more than outnumbered by the benefits of an investment in commercial properties. One of the biggest benefits of this style of investing is the opportunity for diversification. Where most single-family investors are tied to units in their immediate area due to the need for monitoring the investment, commercial investors are much more free to invest wherever they see fit. This can allow them to purchase part-ownership in properties that are diverse in geography, but also asset type and even the type of business plan they will employ. As in other areas of investment, this type of diversity can help to protect an investor from ruin should one specific area of the economy undergo a downturn.
Another perk of investing in commercial property is that the value of these types of properties is more often based on rationality than their single-family counterparts. This is in part due to the immediacy of valuation that comes from the cash flow generated by tenants. Since the property’s income is predicated on occupancy, factors that positively affect occupancy will also positively affect cash flow. These factors include considerations such as proximity to transportation, amenities, and floor plan. This is in contrast to a single-family rental whose income is typically used to pay down the debt incurred when purchasing the property. This makes its worth much more dependent on valuation, which is much more dependent on market forces. By opting for commercial real estate in this case, an investor can play a much more active role in affecting their own income.
Though many first-time investors look to single-family rentals as their initial option for an investment in real estate, many would actually be better served by considering full or part-ownership in a commercial property instead. Outlined above have been some of the supporting reasons for this, provided by investment professional Christopher Linkas (https://www.discogs.com/artist/2617983-Chris-Linkas). By reading his advice and considering all the factors involved with the purchase of a real estate as an income-generating property, even the most novice investor will be better equipped on their quest to purchase property with the goal of increasing their net worth.