A famous quote attributed to Andrew Carnegie is that “90% of all millionaires become so through owning real estate.” The real estate industry has long been an attractive investment option for investors. In recent years, its popularity has only been increasing with the rise of several different investment strategies.
Real estate investments can generally be divided into two main categories: public real estate (or listed real estate) and private real estate (PRE) or private equity real estate (PERE).
Investors may choose to pursue many different real estate investment strategies. Common strategies are core, core-plus, value-added, opportunistic, distressed, and debt.
Core investing is a conservative approach to real estate investing that aims to minimize risk and maximize returns. This strategy targets stabilized, income-generating real estate investments in well-established, attractive neighborhoods.
The core strategy avoids investments in risky, fad-driven markets or properties. Instead, the core approach focuses on investment-grade properties that produce strong, stable income streams. By targeting stable assets, the core strategy allows investors to reduce the risk of their real estate portfolio while still generating competitive returns.
One of the primary benefits of the core strategy is that it can generate reliable returns over time, thanks to the steady income that these properties produce. This passive income can help offset the volatility seen in other asset classes and provide investors with steady returns.
In addition, the core strategy can also be less capital-intensive than other real estate strategies. This can make it more attractive to investors who don’t have large amounts of capital at their disposal. By targeting lower-risk investments, investors can deploy their resources more efficiently and generate attractive returns.
The core real estate strategy is not without its risks, however. These investments can be relatively illiquid, and there can be high-cost associated with buying and selling. Additionally, the strategy can be limited in terms of diversification.
The core element of core-plus investing is rooted in the same conservative principles as the core strategy. Investors target safe, well-established neighborhoods with good quality income-producing assets. The main difference is that the 'plus' allows a fund to invest in improvements to the properties, such as refurbishment or development, to enhance the asset's value.
Core-plus investing is, therefore, a level up from the core in terms of risk. By investing in improvements, core-plus investors are exposed to the chance that the project may not go according to plan or that the anticipated returns may not meet expectations. However, the rewards of successful projects can be significantly higher than core investments that aim to generate steady income streams.
The core-plus strategy is often seen as a way to generate superior returns from an investor’s hands-on management of an asset. This approach can attract active real estate investors willing to bear the risk associated with making property changes. By adding value to assets, the investor can generate higher returns and create a long-term capital appreciation that can be realized through a sale or refinancing.
Value-added real estate investing is a strategy that seeks to acquire and reposition underperforming assets. This approach involves analyzing the potential of a property and its market, then making improvements to the asset that will increase its value.
For example, a parking garage could be transformed into a mobility hub by adding electric charging points and bike or scooter rental services. Even a relatively simple renovation—automating the parking gates, for instance—can generate significant returns. Value-added investors may seek out a parking garage that loses money to theft or inefficient operations, then implement automation and increased security to make the asset profitable.
Residential properties can also benefit from value-added investors. Investors can acquire dilapidated homes at a discount, then add value by renovating or replacing the roof, HVAC systems, floors, or other features. Investors can then sell or rent homes for a profit.
Value-added investing is a higher-risk strategy than core or core-plus investing.
Opportunistic real estate investing is a higher-risk, higher-reward approach to real estate investing. This strategy involves substantial capital investments and development work to transform raw properties or to reposition existing assets.
For instance, an opportunistic real estate investor might acquire land in an up-and-coming neighborhood and develop a plan for large-scale development. This may involve securing additional capital—often through joint venture partners—and assembling a team to manage the design and construction process. The opportunistic investor is then usually responsible for leasing and managing the assets once they are complete.
Unlike core or value-added investing, the opportunistic approach seeks to generate returns from the development and repositioning of the asset itself. While this approach has a high upfront cost and risk if the project does not progress as expected, the rewards can be much higher than other real estate strategies.
Distressed real estate investing is a strategy that involves the acquisition of properties in distress—sometimes those owned by banks or in the foreclosure process—in the hope of creating profits through the sale or repositioning of the asset.
The distressed strategy takes advantage of financial difficulties that can befall real estate owners. When an owner defaults on a loan, banks are often willing to sell the property at a discounted price to limit losses. This, in turn, can provide an opening for investors to acquire the asset and generate returns through repositioning and subsequent sale.
Since the asset is already in financial distress, the risks associated with repositioning and sale can be high. Investors must be prepared to absorb the losses if the asset does not generate sufficient returns.
Debt real estate investing is a strategy that involves leveraging other people’s money to purchase properties. Investors can increase their leverage by taking out mortgages on properties and generating returns without investing large amounts of capital upfront.
The debt approach is desirable to investors who want to begin building a real estate portfolio without having to invest large sums of capital. Additionally, investors can benefit from the tax advantages of debt financing—such as the deductibility of loan interest payments.
Investors must be prepared to make mortgage payments even if the rental income falls short. This means that debt strategies are not without risk—investors may be subject to foreclosure if they do not keep up with their loan payments. Additionally, debt strategies can amplify returns and losses by taking advantage of leverage.
Debt strategies are, therefore, higher risk than core or core-plus strategies but can be an attractive choice for those looking to build their real estate portfolios on a budget.
Several real estate investment strategies are available, including core, core-plus, value-added, opportunistic, distressed, and debt. Each strategy involves different levels of risk and returns potential, so choosing the best strategy that fits an investor’s risk tolerance and investment goals is essential.
By understanding the different real estate strategies, investors can make informed decisions about allocating their capital best and generating attractive returns from the real estate market.