What are the 4 investment strategies?
Core: low risk
Core+: low to moderate risk
Value-added: moderate to high risk
Opportunistic: high risk
Core and core + are the bedrock of diversified portfolio and minimize risk.
As the returns increase so does your risk. So being able to properly diversify among the strategies (at the right time) is crucial to protecting your portfolio.
Historic rates of return: 7 to 11%
Leverage: around 25%
Core real estate is the bedrock of a diversified portfolio. Its real estate that’s located in the strong demand urban center of major metropolitan areas like New York, Los Angeles, and Washington DC.
Core investments are almost as safe as bonds, but with much higher returns.
Unlike the stock market, core investments hold up extremely well in business cycle downturns.
Core investments are the most "all weather" of the strategies, and have the longest window for good timing.
Historic rates of return: 8 to 12%
Risk: low to moderate
Core plus real estate, is similar to core, but not quite as high quality. The property might be in the suburbs, or a secondary metropolitan area. It may include riskier asset types like self storage, entertainment, medical offices, or student housing
Core plus investments are low to moderate risk, and return slightly more than core.
Historic rates of return: 10 to 15%
Risk: moderate to high
Purchasing real estate at a lower price because it is moderately distressed in some way (rundown, poor management, etc.) and selling it for a (hopefully) higher price that covers the cost and makes a profit.
Much of the risk in value-added strategies comes from the fact that they require moderate to high leverage to execute (40 to 70%). Leverage does increase the return, but also increases the risk, and makes the investment more susceptible to loss during a real estate cycle downturn. Value-added strategy assets can be in safer primary locations, or riskier secondary locations.
Historic rates of return: 12% plus
Opportunistic strategies target highly distressed properties that require major renovations. They also involve the development of raw land, into residential or commercial properties.
This strategy is the riskiest, because it involves the use of high leverage (50 to 80%), and the improvement plan is much more complicated than “value-added”, and susceptible to surprises. Additionally, there are usually significant periods of construction when no income can be generated. And often, income can only be slowly built up once that period ends, and may never be built up at all.
That’s why 70%-100% of the return of an opportunistic strategy comes from appreciation of the property, rather than income. Opportunistic strategies can be implemented on primary, secondary or tertiary markets.