Primary Investment Strategies in Real Estate
People invest in real estate for a variety of different purposes. While some investors make money through rental income and profits generated by business activities, others depend on the appreciation of the property over time. Real estate investing can have multiple benefits: a passive income, stable cash flows, tax advantages, diversification, and leverage. Among the many strategies different investors use, no single strategy can be considered better or worse as not one size fits all. A strategy can differ according to the goals and risk tolerance of the investor. The three primary investment strategies in real estate are core, opportunistic, and value-added. Understanding when to use each strategy can play a vital role in determining the investor’s success in the long term. Continue reading to understand the three primary investment strategies in real estate.
Core Investment Strategy
Someone looking to minimise risk in real estate investments can look towards the core or conservative investment approach. Many people who start new in real estate investing tend to adopt this approach. However, some experienced and large investors also take this approach to protect their assets while investing in other industries. Another feature of core investments is that the property is usually located in urban areas in strong mature markets with confident rental market demand. An example of core investing is buying a recently built single-family home with a tenant. These investments involve a significantly lower risk as little to no rehabilitation or construction work is required or a lease-up chance. However, the expected returns are also lower as the risk is minimal. The strategy is also ideal for those with a shorter investment horizon, those seeking to have a stable rental income, and those who want to preserve their wealth while maximising their returns and getting tax advantages.
An opportunistic approach for aggressive investment can be a good option for those looking to achieve higher returns on their investments. In this approach, the investor purchases a raw piece of land in a possibly tertiary market and relies on future growth. Experienced investors or developers can only take this type of investment in the real estate sector. The process of developing any raw land requires multiple permits and the ability to build infrastructure from the ground up. Therefore, these investments involve a significant amount of risk and require expertise for the execution of projects. Hence, they are not taken up by small investors or those getting started in real estate investment. Subsequently, its high-risk nature invests a lucrative option for the experienced investor.
Keeping in mind the investment mentioned above, a more balanced approach is the value-added investment method. This approach involves buying a property that needs some construction or rehabilitation but is otherwise in a healthy and opportunistic market. It can be that the property is not achieving rental income according to its full potential due to some fixable defects. However, the amount of work and expertise required for rehabilitation may vary as changes can range from something cosmetic to something significant such as a kitchen or bathroom repair, remodel, or replacement. Therefore, a property can be similar to a core investment if the amount of work required is less or can be like an opportunistic strategy if complexities are involved. It is easier to understand the difference between the three approaches by looking at their risk and reward profiles. With core investments having the lowest risk, opportunistic having high trouble, and value-added having a moderate risk, the potential for each is directly proportional to the amount of risk involved.
Can Investors Adopt Multiple Strategies
It is not odd that investors will adopt different strategies for investing in real estate and diversifying their portfolios. Many investors start with the core strategy by investing in a rental property to gain experience and minimise their early risks and complexities. This allows them to grow in confidence as getting an accessible rental property in a strong market will enable them to experience the process first-hand without any significant risks. They then buy older rental properties in strong markets that need a moderate number of renovations. If the venture is successful, they can also look towards rental properties in weak markets with a prospect of growth. Finally, investors can work their way to a higher risk and reward opportunity by dealing in properties that require full tear downs or construction from the ground up. Ultimately, the investment strategy an investor opts for is directly related to the investment goals, risk tolerance, and the amount of work the investor is willing to take on. Keeping in mind the three approaches can help a new investor strategise his system and help someone stuck in one phase of the investment strategy to move towards the next.
Investing in real estate can be a rewarding experience for investors. However, not everyone comes equipped with experience in buying, rehabilitating, and selling properties in established or tertiary markets. Investing in real estate is directly related to the amount of risk taken by the investor. Real estate investing involves three main strategies, core, opportunity, and value-added. Each plan caters to different goals, risk tolerances, and the amount of work an investor is willing to take on.