Any decision to invest in real estate is a personal choice that can depend on a person’s objectives, financial situation, tolerance for risk, and investment style. Different real estate asset classes offer different risks and opportunities and, accordingly, different levels of return–so the primary question is: what is the most appropriate investment strategy to adopt?
Broadly speaking, there are four types of investment strategies that real estate investors adopt, with a key driver for choice being the position of the strategy on the risk-return spectrum. However, some of these strategies overlap depending on how a particular deal is classified or the particular property being analyzed.
These four main real estate investment strategies are:
Opportunistic
Value-Add
Core-Plus
Core
In general, the risk-reward-return scenarios associated with these four categories can best be illustrated by the following chart:
The chart is for representation only and does not show the impact of different levels of debt or leverage on risk levels.
As these terms are often used to explain multifamily investment strategies by industry professionals, below, you can find an in-depth breakdown of what each of them looks like and entails for investors.
Opportunistic strategy
This strategy may involve the development of a new building or revitalization by the extensive refurbishment of the existing structure or by adding extra floors and the subsequent repositioning of the building in the market. This may include changing the tenant profile or usage of a building to realize or maximize rental and capital value.
Due to improved cashflows and reduced cap rates, the subsequent appreciation in the value of the property post-renovation is usually the most significant criterion for investment returns.
Relatively high leverage is often used, with debt up to 75% or 80% LTV
Opportunistic properties are typically held for relatively short periods of time (3 – 5 years)
Thereafter, owners may liquidate the asset or execute a cash-out refinance in order to realize all or part of the value they have created
Investment returns expected to be >16% net equity IRR
Opportunistic investments are positioned at the highest end of the risk-return spectrum.
Value-Add strategy
A value add includes enhancing the property’s cash flow by renovation or redecoration by; filling occupancy voids, re-tenanting, eliminating losses-to-lease by tightening operating expenses, and general repositioning of the property in the market.
Investment returns are driven by forced appreciation as a result of the value-added works or strategy rather than annual income returns.
Business plans for value add properties usually call for an exit after value creation when investors will look to redeploy funds into a new opportunity with similar upside. Alternatively, they may execute a cash-out refinance in order to realize all or part of the value they have created, and the stabilized property becomes a longer-term hold period;
Relatively high leverage is often used, with debt up to 75-80% LTV
Value add properties are typically held for relatively short periods of time (3 – 5 years)
Investment returns are expected to be between 11-16% net equity IRR
Value-add investments are positioned just below opportunistic investments, close to the higher end of the risk-return spectrum.
Core-Plus strategy
This strategy focuses on acquiring high-quality assets in secondary locations or slightly dated assets in primary locations, which will likely always retain their value.
Seeking investment property that generate healthy annual income returns over the longer-term holding period but with slightly more risk and a slightly higher expected return or premium compared with properties than in the core strategy;
Only moderate leverage is used, with debt around 40-60% LTV
Investment returns are expected to be between 7-12% net equity IRR
Core-plus investments are positioned just below value-add investments landing in the middle/lower end of the risk-return spectrum–being only slightly riskier investment strategies than “core strategy” investments.
Core strategy
More commonly known as “buy and hold.” This strategy focuses on acquiring quality (Grade A), relatively modern, or very well-located real estate which is able to generate stable annual income returns over the longer term. This income may be close to its maximum potential but has an upside due to the ongoing demand for such property;
Only moderate leverage is used, with debt around 30-50% LTV
Investment returns expected to be between 5-8% net equity IRR
Core investments are positioned at the lowest end of the risk-return spectrum, with their stable income and quality mitigating risk.
Breneman Capital
Breneman Capital (formerly Rise Invest) is a data-driven multifamily investment firm pushing the real estate industry into the future with a modern approach to direct real estate investments.
We focus on providing our investors with the best risk-adjusted investment opportunities in carefully selected markets across the U.S., researched and underwritten with extreme detail from our headquarters in Chicago.
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