Types of Real Estate Investment Strategies
When investing in commercial real estate, there are traditionally four types of investment strategies:
- Core is the most conservative strategy, and might only include properties offering lower-risk and lower potential returns because they exist in well-populated or well-traveled locations. This strategy might also focus heavily on investment in high-quality, high-value properties that require very little redevelopment or maintenance. These properties offer predictable cash flows and are commonly comprised of fully leased, multi-tenant structures.
- Core-plus requires a bit more risk, but can offer a higher return than the core strategy. These properties require modest levels of value-added activity or enhancement to the location.
- Value-add is a medium-to-high-return, moderate-risk strategy that centers more on property development and market timing. In this strategy, portfolio managers purchase properties, engage in some level of redevelopment, and sell when the market is performing. Value-added properties typically require changes to management, physical improvement, or the addressing of capital constraints. These steps include building renovations and seeking ways to increase rental rates in improving markets. Value-added strategies also include the turnaround of failing operating companies or assuming debt for control of underlying properties.
- Opportunistic provides the highest level of return but assumes the most risk. With this strategy, managers purchase properties that include undeveloped land or in markets that are underperforming or lightly trafficked.
