Noah George - Understanding The Main Commercial Real Estate Investing Strategies

Noah George - Understanding The Main Commercial Real Estate Investing Strategies Main Real Estate Investment Strategies Commercial real estate investments are usually categorized into four main investment strategies: Core Core Plus Value-Add Opportunistic It’s important to become familiar with each of these because the strategy you take can help you diversify your investments according to both risk and return.

This is especially important at certain points in the market cycle because these strategies can help you stick to the level of risk you’re comfortable with. Don’t worry, we’ll get more in-depth on each of these in just a moment.

Investment Categories Defined To see where each investment might fall, we look at a few key factors: Amount of leverage and debt used (how much do they borrow for the deal?)

Physical condition of the property – great condition, will need repair soon, poor, or needs significant rehab now Property location (the market) and tenant demand Type of property (multifamily, industrial, office space, etc.)

Length and terms of current leases in place (long-term leases vs. short term) 1. Core Goals: The main goal for Core investors is to generate steady, reliable income with little risk involved. Capital preservation is the key for this type of investor. Cash flow is way more important than appreciation, and the investor is looking to avoid volatility at all costs.

Expected Returns: A Core investor can expect to receive a 7-10% rate of return.

Details about the property: “Core” properties are typically located in prime markets; are fully tenanted, and operating at full capacity. Very little active management is necessary because the property is already considered to be “fully stabilized.”

2. Core Plus Goals: Core Plus investors are also looking to generate steady income, but are willing to take on a little risk for potentially slightly higher gains. The property might require some slight renovations, but they’re still very high quality and have great tenants.

Expected Returns: 9-12%.

Details about the property: “Core Plus” properties are in very good shape, in a good market, and may require some slight renovations down the line. It is filled with great tenants, but some leases may be up for renewal. Core Plus investors would be wary of this, but would also see it as an opportunity to raise some rents and increase income.

3. Value-Add Goals: The goals of the Value-Add investor is to have some cash flow initially, but they’re really looking for the potential for increased gains through a solid business plan and smart management.

The business plan will likely include making some renovations, which will increase rents and the net operating income of the property. This increase in Net Operating Income (NOI) “forces” appreciation, resulting in an increased value of the property.

A value-add investor looks at the upside potential. Some consider this the best balance between risk and return because there is some cash flow, but with a larger upside for increased gains.

Expected Returns: 12-18%.

Details about the property: The “Value-Add” property is not operating at full capacity, may have a decent amount of vacancies, and needs updating. It will take some work to get there, and this is dependent on whether the business plan is executed well. There will also need to be some good market timing.

4. Opportunistic Goals: The goal of the opportunistic investor is to primarily look for upside potential and significant returns. Immediate cash flow is not a primary concern. The opportunistic investor is able to see a big vision and see the property as a pathway to significant gains. The investor is content to wait for these returns, which could be anywhere from 3-7 years.

Expected Returns: 15%+.

Details on property: Development deals fall under the “Opportunistic” category. So does positioning a building from one use to another, or even a completely empty building. These properties are often in emerging markets.

How do you know what type of investment strategy is involved?

Hopefully, some of the criteria above will help you to figure it out. If not, though, another way is to simply ask the operator. They should have the strategy well thought out and will let you know which way they’re leaning. Their deal offering and expected returns will likely give you the best idea.