Many who seek to invest in the world of real estate for the first-time inevitably turn their attention to the potential afforded by purchasing a single-family home for use as a rental property. It’s understandable for first-time investors to gravitate to these types of properties, they more than likely have purchased a single-family home for themselves and feel some familiarity with the process. However, professional investors often caution that this type of investment is, in fact, less desirable when compared to the opportunity to put one’s money towards commercial real estate. We recently sat down with real estate investor, Christopher Linkas, who helped explain why this is the case. The following is a look at the advice he’s made available for first-time investors.
Before examining his advice, let’s take a look at where the expertise of Christopher Linkas comes from (Connect.Data). An alumnus of Bowdoin College, he found that when he graduated in 1991, he was emerging into an economy that was being hit hard by the savings and loan crisis. Where many careers were severely derailed in this environment, he was able to use the situation as a learning experience and further his understanding of investment throughout it. By thoroughly examining the landscape of the time, he was able to secure a position in which he valued collateral from repackaged loans. This not only got him his start in the world of investment, it provided him with firsthand experience in examining loans and understanding how the modern economy functions. He would eventually transition into the world of real estate investment, which would help provide the basis for his advice in this article.
Downsides of Single-Family Units
Though they can seem appealing for their approachability and similarity to one’s own home purchase, single-family homes when purchased as a real estate investment can present the investor with a host of problems. One such problem is a lack of sustainable cash flow for the investor that purchases a home through the use of debt. Since most first-time investors are using a loan to purchase a single-family rental unit, any cash that they receive from their tenants will most likely be used to pay off the debt they have accrued during the property purchase. This leads to a situation in which the investor is making no money off of their investment, and is instead relying on the value of the property to increase in order to make a profit. This can be a risky gamble as this value is tied to market forces beyond the investor’s control.
This also can lead to a difficult situation that confronts many first-time investors who purchase a single-family unit as an investment, namely that the property can depreciate in value. This can be especially damaging in the case of a property that was purchased through the use of leveraged debt. In these cases, an investor who sells their property during a downturn may, in fact, owe their lender more money than they had to put up to secure the initial loan. In this way, the purchaser of a single-family home opens themselves up to potentially costly and difficult to navigate situations.
Real Estate Experience
One of the reasons Christopher Linkas is able to provide insight into this area of investment is that real estate has been a large part of his area of expertise for some time now. In addition, he also has an extensive background in the world of credit, which is often tied to real estate investment. At present, he is based in London and heads a team of twenty in the work he does for his credit group. That group is responsible for a number of different investment opportunities throughout the UK and Europe. Some of his current regions of focus include France, Greece, Scandinavia, and Germany. Some of the topics of expertise for his group include shipping, renewables, leases, corporate loans, and of course, real estate.
Benefits of Commercial Real Estate
Now that we’ve seen some of the ways in which a single-family home can get first-time investors into trouble, let’s explore some of the positives of investing in real estate. One big perk of this method of investment is that the value of the property is correlated to the income it is able to generate. Rather than use income to pay off a debt that was used to purchase a property, commercial real estate can most often generate a net positive cash flow for its owner. That means that the value of the investment is not solely dependent on outside market forces, but instead on an operators ability to find paying tenants who are willing to rent out the space. Already this helps to make commercial real estate more of an investment and less of a gamble when compared with a single-family home.
Another positive when it comes to this method of investment is the ability for a first-time investor to co-invest with professionals who have more experience in this area. This is a huge benefit for a novice investor as they have the benefit of being partnered with someone who has a better idea on how to generate a positive return on an investment. In addition, a first-time investor can learn a lot from the example set by their more experienced partner, which is something that will benefit them in future investments later down the road.
Though there can be plenty of value to be gained from investing in a single-family property, in many cases a beginning investor may find that they are able to generate more money from an investment in commercial real estate. Stemming from his experiences in the world of finance and real estate, investment professional Christopher Linkas has been able to provide numerous points above to help those who are new to this area navigate this difficult decision. By reading his advice, one can be better equipped to make these choices for themselves, and ultimately take a greater degree of control over their own financial wellbeing.