Investing in commercial real estate can be both highly rewarding and highly risky. It is an investment that can be very rewarding for investors who are patient and prepared and who are willing to accept some risk in order to have the possibility of higher gains. When you are considering a high-risk and high-reward investment, your best bet is to tap into the wisdom of experts who have track records of success in that investment field. One of the world’s foremost experts in commercial real estate investing is Christopher Linkas, and we are thrilled to be able to bring his advice to you today.
Experience on Both Sides of the Atlantic
The world grows smaller every day. Savvy investors know that economic conditions in one region of the world both affect and are affected by conditions throughout the rest of the world. The experience Christopher Linkas has with commercial real estate investment on both sides of the Atlantic Ocean makes his advice even more valuable to investors. His intimate knowledge of investing in different countries gives him a perspective that many other investors lack, which gives him a competitive edge. In the United States, Linkas was a vice president in the renowned investment banking firm Goldman Sachs. He presided over a joint venture between two of the firm’s key departments, the Fixed Income Group and the Investment Banking Group. Under his leadership, the knowledge and skills of these two groups were combined to provide clients with outstanding opportunities to invest in commercial mortgages.
Christopher Linkas built on his commercial real estate success at Goldman Sachs to take on a new challenge. He became the leader of the commercial real estate area of a UK-based investment group. Starting with a focus on debt and equity commercial real estate investing in North America, Linkas soon expanded his area of responsibility to encompass investing throughout Europe in real estate and other opportunistic ventures. We are fortunate to have Christopher Linkas share his knowledge with our readers. He started by explaining the two types of commercial real estate investments:
Direct and Indirect Commercial Real Estate Investments
The first decision an investor in commercial real estate has to make is whether to invest directly or indirectly. Direct investment may seem simpler at the outset, but indirect investment has important advantages.
What Is a Direct Investment in Commercial Real Estate?
Purchasing commercial real estate properties directly from their owners is a straightforward way to invest. Many different types of properties are available for direct purchase, including office buildings, retail stores, restaurants, and hotels. You can invest as an individual or through a real estate investment partnership. It is easy to find commercial properties for sale because there are listings available online.
There are, however, several significant drawbacks to investing directly. The first is that the down payment required to purchase a commercial property will generally be high, typically 30 percent or more. The second disadvantage of investing directly is that owning commercial property requires that you take on time-consuming and often inconvenient tasks. When you are the landlord, you are responsible not only for the ongoing maintenance but also for any emergencies that arise. Things happen unexpectedly, and you can lose control of your time. You may also have to deal with tenant turnover and spend time finding new tenants or evicting bad ones. It is for these reasons that Christopher Linkas recommends you at least consider indirect investing.
What Is an Indirect Investment and What Are Its Advantages?
Indirect investment in commercial real estate gives you a way to participate in this high-reward type of investment without having to come up with a huge down payment and without having to deal with all the problems that come with being a landlord.
There are several types of indirect investments:
REITs (real estate investment trusts) provide an easy way to invest in commercial real estate. You can think of them as the real estate equivalent of mutual funds. Just as mutual funds hold a variety of stocks and/or bonds, REITs hold a variety of real estate properties.
In addition to eliminating the need for a down payment and the need to be a property manager, there are five additional main advantages that REITs have over direct commercial real estate investments:
- Because REITs hold a variety of commercial properties, investors in REITs gain all the advantages that come with diversification.
- REITs are publicly traded on stock exchanges. It is far simpler to buy and sell shares of REITs than it is to go through the complex procedures and steps necessary to buy and sell real estate directly.
- REITs are highly liquid. When you own commercial real estate, you may not be able to find a buyer at the time that you want to sell. With REITs, you don’t have that problem.
- REITs may have tax advantages.
- REITs generally offer high yields.
ETFs (exchange-traded funds) that track commercial real estate indexes provide another option for investing indirectly in commercial real estate. Like REITs, ETFs are very easy to buy and sell on the public stock exchanges. ETFs that track REIT indexes offer investors even more diversification than investing in a single REIT.
CMBS (commercial mortgage-backed securities) offer a third way to invest indirectly in commercial real estate. These investment vehicles contain bonds or other fixed-income securities that are backed by commercial mortgages. Like REITs and ETFs, these securities are more liquid than direct investments.
Is It Better to Invest in Commercial Real Estate of Residential Real Estate?
We again turn to Christopher Linkas for advice and are again thankful that he has shared his knowledge with us. The range of his experience is especially valuable. When he got his first job after college, the country was in the middle of an economic recession. He worked for a consulting firm and for private equity firms and gained valuable knowledge of how people can maximize their investments in all economic climates. This early work experience made Linkas appreciate investment strategies that are flexible. He believes that investors do best when they are prepared for the inevitable rises and falls of the market. One way to do that is by making sure you perform your due diligence to understand the investments you are making.
Few people understand commercial real estate investing as well as Christopher Linkas does. His five years of commercial mortgage experience at Goldman Sachs and his current responsibilities managing commercial real estate and other investments throughout Europe for a UK-based firm give him the kind of insider’s knowledge that can greatly benefit new investors. Before you begin investing in commercial real estate, you should understand how it compares to investing in residential real estate. The differences can be significant.
Why Commercial Real Estate Can Be a Better Investment Than Residential Real Estate
The most important advantage of commercial real estate investing over residential real estate investing has to do with differences in the leases in the two types of real estate. Commercial leases are generally better for investors for two main reasons:
- Commercial tenants often lease for longer terms than residential tenants. A typical lease for office space or a retail store might run for as long as 10 years. A residential lease might run for only a year or two at a time. The longer leases that are common in commercial real estate provide investors with a more predictable and stable cash flow.
- Commercial lease rates tend to be high, especially in areas where new commercial construction is limited. These higher rates provide investors with both higher monthly cash flow and increased value of the investment.
Why Commercial Real Estate Can Be a Riskier Investment Than Residential Real Estate
Despite having the advantages of potentially longer lease terms and higher cash flow, commercial real estate investing also has some drawbacks. The main disadvantages involve regulations and tenant turnover. Investors in commercial real estate have to deal with a complex web of regulations. Laws and rules on the federal, state, and local levels all affect commercial real estate. Investors must be compliant with all the applicable laws at every stage of their investment, including when they purchase property, maintain it, pay taxes, and sell it.
Another aspect of real estate investment that creates more problems for commercial investors than residential investors is tenant turnover. For example, if you invest in an apartment building, you probably won’t need to make major changes in an apartment every time one tenant leaves and another moves in. With commercial real estate, the situation is different. You are more likely to have to undertake expensive renovations. Say you own a strip mall. Between the time that one tenant moves out and another moves in, you are likely to have to do extensive remodeling. Often tenants want to use the space for completely different purposes. If a clothing store leaves, and a restaurant moves in, the space will need to be completely redone. For this reason, when considering commercial properties, you should look for properties where tenant turnover is low. Even so, your overall renovation costs are likely to be higher than they would if you invested in residential properties.
Basic Concepts in Commercial Real Estate
To become a knowledgeable commercial real estate investor, you need to become familiar with the way that real estate is classified and with the different types of leases. There are several classification systems for commercial real estate. A common system is to classify properties as Class A, Class B, or Class C. Class A buildings are the most desirable, with good locations and building quality. They will generally cost the most to purchase. Class B buildings are less expensive and can be a good investment opportunity for someone who is willing to restore them. Class C buildings are the least expensive. They are often in undesirable areas, need a lot of work, and maybe more than 20 years old.
Investors also need to understand the different types of leases that are used in commercial properties. The most commonly used leases are known as gross, single net, double net, or triple net. In a gross lease, the landlord pays for the property taxes, insurance, and the maintenance of the property, and the tenant only has to pay rent. In a single-net lease, the tenant pays the rent plus the property taxes. In a double-net lease, the tenant also pays insurance. In a triple-net lease, the tenant pays the maintenance as well.
How Christopher Linkas Gets His Investing Ideas
Having an in-depth knowledge of what you are investing in is a crucial part of being a successful investor. But the great investors know there is another essential ingredient. Inspiration plays a vital role in coming up with investment ideas. Where does Linkas get his inspiration? He emphasizes that it is important to stay alert for opportunities. You never know when a great opportunity will appear, so you have to be ready to act at any time.
How to Prepare Yourself to Be Ready for Investing Opportunities
Preparation doesn’t happen by accident. You have to consciously prepare yourself so that the next time you have a chance to become involved in a successful commercial real estate investment, you will be able to seize the moment and not let the opportunity slip away. To be prepared, you need to be at the top of your game. You have to be able to recharge your energy, so that your mind is alert and working at its peak potential. Christopher Linkas advises investors to engage in challenging activities outside of work. He believes that is a highly effective way to clear your mind, reduce stress, and regain the perspective you need to jump on opportunities that may appear only briefly in today’s volatile market.
Getting Investment Ideas by Solving Problems
In addition to keeping your mind refreshed and alert, it is also important to hone your problem-solving skills. Exceptional investors like Christopher Linkas recognize that instead of avoiding problems, you should learn to see problems as opportunities. In fact, Linkas says that he gets many of his best commercial real estate investing ideas when he has a problem to solve. To become a better problem solver and a better investor, you should make a point of associating with smart and successful business people. Your mind will be stimulated when you interact with them. Your ability to brainstorm and come up with profitable investing ideas will grow when you have cultivated a network of bright and knowledgeable people.
Do Your Research Before Investing in Commercial Real Estate
In addition to staying alert to opportunities, there is another essential part of being prepared. You need to do your research. Christopher Linkas says that when you have done your research in advance, then you will know what you should be looking for, and you will be better able to recognize opportunities when they arise. Linkas also advises investors to be patient. Don’t try to rush or take shortcuts that will only hurt you in the long run. It’s better to be thorough in your research and preparation. Patience is also necessary when you are putting together real estate deals. These deals are complex and involve many people, so they will take time. If you have made a decision to invest in commercial real estate, and if you have done your research and are mentally prepared, the next step is to consider the question of whether this is a good time to invest.
What is the Current Outlook for Commercial Real Estate Investing?
Since the recession ended approximately 10 years ago, the market for commercial real estate has been recovering. Commercial real estate prices rose steadily up until the last couple of years, when prices leveled off and then actually started to decline. Christopher Linkas believes that there is still a lot of opportunity in the commercial real estate sector. However, knowledge and preparation are no more important than ever. The savvy investor must be able to differentiate good investments from bad.
Some sectors of commercial real estate are weaker than others. Having retail tenants is especially risky right now. Brick-and-mortar retail stores have been struggling as consumers increasingly do their shopping online. When the stores lose business or close down altogether, the shopping centers and other commercial buildings that leased space to the retail stores also face losses. Office buildings, on the other hand, still provide a good investment opportunity, as do supermarkets in certain areas, according to Christopher Linkas.
Preparation Can Lead to Profits
For investors who have done their homework, commercial real estate can offer good opportunities for steady cash flow and rising value. It is, however, essential that investors are well prepared and have a good understanding of the commercial real estate market as a whole and of the properties they are purchasing. Commercial real estate is not an investment that you make once and then forget about. Market conditions can change quickly. Christopher Linkas recommends that you review your commercial real estate investment portfolio every six months. Consider your investments as objectively as possible and decide whether you need to make any changes to your portfolio. Investors who are patient, who are willing to do the work necessary, and who have a reasonably high-risk tolerance are best suited to commercial real estate investing. For those investors, the rewards can be substantial.
More about commercial real estate and Christopher Linkas at https://www.kirkland.com/sitecontent.cfm?contentID=226&itemid=11779