Maarten De Jeu Breaks Down the Benefits of Investing in Commercial Real Estate
We recently had the pleasure of meeting Maarten de Jeu, Founder and Managing director of SVM Advisory. We asked him to discuss the benefits of investing in Commercial Real Estate. He provided his perspective on the topic for us to share. Enjoy!
My name is Maarten De Jeu, and I’m the founder and Managing Director of SVM Advisory. Since 2012, myself and my colleagues have acted as accomplished advisors for financial services and insurance companies, Ultra High Net Worth individuals and many, many more.
Anyone in this position can tell you that the job itself is filled with consulting — it’s one that requires an expert set of skills and an intimate knowledge necessary to tell people what they need to do and, more critically, how they need to do it. My approach varies depending on the client, as no two people (and no two businesses) are created equally.
But at the same time, when people come to me in search of a quality, realistic and passive way to invest over the long-term, I always tell them the exact same thing:
“You need to think about commercial real estate.”
“I don’t think that’s for me,” they sometimes say to me. “I’ve heard the horror stories. Dealing with tenants. Maintenance problems. Sky-high property taxes. I don’t think I need any of that stress in my life.”
“That’s residential real estate,” is always my reply. “I’m talking about the commercial side of the equation.”
According to one recent study, there is about $6 trillion worth of commercial real estate in the United States alone. Retail locations make up the biggest portion, but hotels, office buildings and industrial properties are right at the top of the list, too.
Despite the fact that this market is obviously growing, there’s still a wealth of untapped potential here just waiting to be taken advantage of by savvy investors who know what they’re doing. All told, there are a wide range of different benefits that your decision to invest in commercial real estate will bring to the table that you should absolutely be aware of moving forward.
Investing in Commercial Real Estate: An Overview
While it’s certainly true that investing in commercial and private real estate are processes that have a lot in common, there are also a few important distinctions that you need to be aware of moving forward.
In a larger sense, commercial real estate is a term used to describe any type of property that is used to generate profit. This can include not only things like office buildings and industrial property, but also apartments, hotels, malls and even farmland.
As a result of all this, the two main ways that commercial real estate earns money come down to A) income, and B) appreciation. Income is any money generated by the normal operation of the building, while appreciation refers to a notable increase in the property’s value over a longer period of time.
Thanks to the fact that there are examples of commercial real estate all around us, investing in this space has become very popular — this despite the fact that it also certainly requires a larger investment (both in terms of time and money required) than alternatives.
The Benefits of Investing in Commercial Real Estate
Investing in commercial real estate is particularly attractive when you compare the process to something like buying stocks and/or bonds. Stocks and bonds are traded frequently and in high volumes on the secondary market. Commercial real estate, on the other hand , is scarce — thus allowing it to preserve its intrinsic value as a hard asset.
When you purchase a stock, you’re really concerned with one priority: their selling potential. With commercial real estate, you also get to focus on a property’s ability to act as a source of income — potentially generating a far larger return in the long-run.
Investing in commercial real estate is also a great way to mitigate risk from some of the challenges associated with investing in another type of property like a single family rental. In that situation, a lack of sustainable cash flow is always one of the biggest hurdles. You’re essentially at the will of the housing market more often than not. There’s also a significant amount of excess risk involved. In a worst case scenario, the amount of debt could far, far outweigh the original investment due to circumstances that are largely beyond your control.
With commercial real estate, however, you’re looking at an entirely different situation. One of the major benefits of entering this market has to do with a concept called “asset value correlated to net operating income,” otherwise known as NOI.
In other words, the actual value of a property is directly related to its ability to generate income — thus single-handedly avoiding the cash flow related issues as outlined above. This is also why you can make money on a piece of commercial real estate regardless of what the housing market is currently doing, which is not something you can say from a single family rental.
Another one of the major reasons why investing in commercial real estate has become so popular is because it’s very, very easy to co-invest with seasoned professionals. It’s not hard to find a group of co-investors with proven track records behind them. This alone is a terrific way to mitigate risk by teaming up with people who have already been in this situation before.
Commercial real estate also gives you a greater degree of control (and, by association, diversification) that other forms of real estate do not. Depending on the property, you can select real estate based on all the factors that matter most to you — from the type of building to geographical conditions to its business plan and more. At any given moment, there is truly no limit to where you put your money and what that attention could eventually do for you in return.
Finally, it’s important to note that the world of commercial real estate is also far more rational than private real estate — another factor that contributes to one of its major advantages. Yes, factors like a building’s proximity to public transportation sources, suite size and others are inherently complex — but they’re also based in reality. This makes it easier to project a property’s performance over time in a way that you would have a difficult time doing with private residences.
The Additional Advantages of Commercial Real Estate
As stated, another one of the major advantages of commercial real estate worth noting is that, by and large, it’s far less volatile than a lot of people realize. Unlike with private residences, long-term rental arrangements are very common — lease agreements of three to five years are typical, although some can be for even longer than that.
There are also a number of different opportunities to increase a commercial property’s ability to earn an income that you wouldn’t have access to via alternative means. This is thanks to the fact that commercial real estate is a hard asset. You could always maximize occupancy to increase value, remodel the building and more.
Along the same lines, commercial real estate is an excellent opportunity to combat against the ever-present threat of inflation. Whenever the prices of goods and services increase, real estate usually benefits because wages (and profits) increase as well. This directly impacts not only the amount of money that you’re able to charge for a space, but what those tenants are able to pay, too.
Finally, commercial real estate also brings with it a number of potential tax benefits that you should be aware of — provided that it has been properly structured in the first place.
Depending on the circumstances, you could easily claim deductions related to not only interest expenses but also things like depreciation, too. To speak to the former, the IRS allows investors to deduct certain portions of a property’s depreciated value due to the cost of necessary functions like maintenance and general upkeep. This is usually a great way to defer some of your tax obligation in a way that you wouldn’t have access to with alternative forms of investment.
In the End
It’s important to note that none of this is to say that you should NEVER invest in private real estate. As always, everything has its place and, if you approach things from the right angle, it can be a very lucrative decision to make.
It’s just that investing in private real estate also brings with it some challenges that are difficult — and in some cases, impossible — to overcome. This is an active form of investment, meaning it requires you to be far more hands-on than people realize or are comfortable with. Unforsaken capital costs like a sudden need to replace a roof or a driveway could easily wipe out profitability up to this point. Occupancy is either 100% or 0% — there really is no in-between. The list goes on and on.
With commercial real estate, you have almost none of these challenges in your future. Yes, investing in anything always comes with a certain amount of natural risk and there’s no such thing in this life as a sure bet. But commercial real estate is probably about as close to that as you can get, making it easy to see why it’s become so popular with so many people over the last few years in particular.
About Maarten De Jeu
In addition to being the founder of SVM Advisory, Maarten De Jeu also proudly serves as its Managing Director. Originally founded in 2012, De Jeu and his colleagues have spent the better part of a decade bringing their unique blend of industry knowledge, technical skills and a deep understanding of global institutional and cultural settings to organizations across not only North America, but in Europe and Asia as well.
Maarten De Jeu received his MBA at the University of Oxford, where he was also ranked first in his class. Since graduating, he has served as an advisor to senior executives for Fortune 100 companies, Ultra High Net Worth individuals, technology startups and many, many others.
In addition to founding SVM Advisory, De Jeu is also the co-funder of a successful technology startup known as SpeakUp. Since its inception, it has acted as one of the leading ethics and compliance solutions for publicly listed companies available anywhere in Europe today. De Jeu is also affiliated with many notable community and business associations, including but not limited to The Economic Club of Chicago, The Museum of Science and Industry and The Environmental Law and Policy Center.