Ranging from more conservative to more aggressive risk profiles, each strategy has its own merits and considerations.
So what do real estate investors need to know about each strategy? Let’s break it down.
- Core: low risk
- Core plus: low to moderate risk
- Value-add: moderate to high risk
- Opportunistic: high risk
Core and core plus are the bedrock of diversified portfolios and minimize risk.
As the return potential increases, so does your risk. So being able to properly diversify among the strategies (at the right time) is crucial to protecting your portfolio and your capital.
- Historic rates of return: 7 to 11%
- Leverage: around 25%
- Risk: low
Core real estate is the foundation of a diversified portfolio. It represents real estate that’s located in the strong demand urban centers 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%
- Leverage: 40-50%
- 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 can yield returns that are slightly higher than core real estate.
- Historic rates of return: 10 to 15%
- Leverage: 40-70%
- Risk: moderate to high
Typically, with value-add real estate investments, you’re 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-add strategy assets can be in safer primary locations, or riskier in secondary locations.
- Historic rates of return: 12%+
- Leverage: 50-80%
- Risk: high
Opportunistic real estate 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 typically much more complicated than “value-add”, 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 in primary, secondary or tertiary markets.
In order to properly evaluate real estate investments, it is important for investors to understand the characteristics and risk profiles of each strategy. Each investor has different investment objectives, risk tolerances, and considerations, which is why at Republic Real Estate, we intend to curate a diverse array of vetted property and real estate fund investments. We believe everyone should have the tools, knowledge, and access to construct their own real estate portfolios.
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.