Intro to Commercial Real Estate Part IV

The Four Primary Real Estate Strategies

These are the four broad investment strategies in real estate. They’re visually depicted here as a linear spectrum. As you progress from left to the right on this spectrum, your risk and return are increasing. This is a simplification of the world, but it is conceptually and directionally correct. Below, we define and contextualize the four strategies and map them to target returns for each strategy below.

Core

• Conservative, lower risk

• This is a steady income play, think of a “dividend stock”, or more akin to a corporate bond

• You can expect to clip a steady coupon and low probability that you’ll

sustain any loss in principal

• Best real estate in the best markets

• Turnkey in that not much work is required

• Low leverage used in these transactions as returns are lower: 45-50% LTV

• Modest returns: 6 – 8%

Core Plus

• Low to moderate risk

• Income and some growth

• Either older properties in the best markets, or best properties in second tier markets

• Maybe some repairs or maintenance

• Fairly low leverage

• Fairly low leverage: 45 – 60% LTV

• Moderate returns: 8 – 10%

Graphic depiction of the four strategies

Value Add

• Moderate to higher risk

• Focused on appreciation, typically moderate to little cash flow initially

• You do some work to achieve your returns

• Make repairs to units

• Significant lease up

• Improve operations

• Higher leverage: 60 – 75%

• Higher returns: 12 – 15%

Opportunistic

• Most aggressive, highest risk

• Execution driven

• Ground up development, intensive redevelopment, complete re-tenant strategy

• Very little to no cash flow at inception, but potential for most growth in

cash flow and most appreciation

• Highest leverage: 70% +

• Highest returns: 20% +

There may be some overlap at the fringes of these strategies, but this is more or less what the real estate world consists of, and your returns are a direct function of the risk you’re taking. 

Within reason, risk is an agnostic term. It’s neither good nor bad, as long as you fully understand the risks inherent in your investment, and you’re being fairly compensated for it.