Four Types of Real Estate Investment Strategies
Find your Real Estate Investment Comfort Zone
It makes sense to have a plan before investing in real estate. Every property is unique, but for the purpose of developing an investment strategy, a property can be placed into one of four main categories – Core, Core Plus, Value Add and Opportunistic. Once you understand the risks associated each category, you can formulate your investment plan. As the projected rate of return increases, your risk is likely to go up. You might be more comfortable sticking to properties in a lower risk category, or you may want to create a more balanced portfolio with investments in different categories.
Category 1: Low Risk Core Investments
Core properties are the most conservative real estate investments you can make. They are fully stabilized and attract investors who favor yield over appreciation, with most returns coming from income. Core properties do not require improvements, they hold up well during downturns in the business cycle and historically they enjoy the best liquidity. Returns, while attractive, are the lowest of all the investment categories. The best time to invest in new Core properties is during recovery and expansion market cycles. Core residential properties tend to be low leverage luxury apartments with low vacancy rates located in the vibrant downtown of a major metropolitan area. A Core office or retail property may be located in the CBD (Central Business District) of Washington, D.C., Chicago or Manhattan.
Category 2: Safety and Opportunity with Core Plus
Core Plus properties attract investors who want a mix of safety and upside opportunity. While these properties are generally well-maintained and well situated in a secondary metropolitan area or in the suburbs, you might find issues with the property. They may need renovations, several office building leases may be due to expire, or some renters in an apartment may have less than a stellar credit rating. As a Core Plus investor you are looking for real estate opportunities that are fundamentally sound but may have problems that can be solved with minor physical and operational adjustments in exchange for an enhanced ROI (Return on Investment) compared to Core properties.
Category 3: Value Add Investment
Value Add investments are ideal for investors who want to enhance a property in exchange for a greater return. Some Value Add investments have a good balance of risk and reward, and it is important to do your homework. Value Add properties might be highly leveraged to allow for improvements, making them susceptible to losses in an economic downturn. If you are considering a Value Add property, make sure the property is leveraged properly, with good debt structure on rate and terms. Ideally, making an acquisition at a discount price. As a Value Add multi-family investor you might seek older properties in need of upgrades that sell for a substantial discount. You can then improve the property, bring occupancy rates up to comparable and sell it as a Core/Core Plus property. A good time to invest in Value Add rental properties is when home ownership is at a low and demand for apartment rentals is high.
Category 4: High Rewards and High Risk with Opportunistic Investments
Opportunistic real estate investments are not for the faint of heart. Investors are willing to assume greater risk in exchange for potentially huge returns. An Opportunistic property is typically highly distressed and in need of major renovations. Developing land into a residential or commercial property is also considered an Opportunistic investment. Keep in mind that there will be substantial timeframes during construction when no income will be generated. Opportunistic investments are often highly leveraged. Such investments are far safer as the property market rises, and they should be avoided at the end of a falling market.
Tips for Planning your Real Estate Strategy
When you put together your real estate investment portfolio, consider the property type, the geographic location and the market cycle along with the investment category of the property. Consider your risk tolerance before you invest, and be prepared to stay in the game for the long haul, if necessary