Types of Real Estate Investment Types, Simplified
By Rebekah Green on 12/25/2024.
Reviewed by Hezekiah Randolph
In the 2020s, real estate terminology is evolving to encompass a broader range of real estate investment strategies, categorized based on their associated risk and potential rewards.
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Real estate investments are now commonly classified into four categories:
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Core
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Core Plus
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Value-Add
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Opportunistic
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While these terms are relatively new, there remains some variation in their usage among real estate investors. However, there is a general consensus within the industry regarding the essence of each category.
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In this article, we aim to provide comprehensive insights into each investment asset class. We will delve into:
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The primary objectives of each investment type,
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The typical risk and reward profiles,
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And the general investment timeframes.
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Moreover, we will offer real-world examples of core, core plus, value-add, and opportunistic investments to illustrate how these classifications manifest in practical scenarios.
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By the conclusion of this article, you will be equipped with the knowledge to determine the investment class that aligns with your current objectives and identify potential avenues for diversifying your real estate portfolio moving forward.
Opportunistic
Value-Add
Core+
Core
Risk/Volatility
Potential Returns
What is Core Real Estate Investing?
Core real estate investments are characterized by low-maintenance properties situated in prime locations that attract high-quality tenants with excellent credit scores. Typically, these properties are financed with less than 50% debt, allowing investors to maintain significant equity and minimize risk.
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Among the four asset categories, core investments offer the lowest risk and highest stability. They are often considered an ideal starting point for real estate investment endeavors.
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A common example of core real estate investing is the acquisition of existing, tenant-occupied residential rentals in good condition, particularly when purchased with a down payment of 50% or more. These properties generate reliable cash flow from well-qualified tenants and benefit from long-term appreciation, requiring minimal investor intervention.
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Core investments are also prevalent in commercial real estate, with box stores serving as a prime example. These properties typically house credit tenants on extended leases spanning 10, 20, or 30 years, ensuring stable income for decades with minimal owner involvement.
However, the downside of core investments lies in their comparatively lower returns. Investors can expect annual returns of 7-10%, which, while solid, may not match the potential returns offered by riskier asset classes.
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Characteristics of Core Investments:
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Risk Level: Low
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Reward Level: Moderate
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Timeframe: Long-term
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Primary Goal: Stable cash flow with some growth
What is Core Plus Real Estate Investing
Core plus investing mirrors core investing in many aspects but with two notable distinctions: higher debt leverage and increased asset management responsibilities.
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While core investments prioritize low debt leverage and minimal maintenance, core plus investments embrace slightly higher risk levels by opting for properties with greater maintenance needs or situated in less desirable locations, albeit with growth potential. By leveraging more debt, investors aim to enhance both the risk and reward potential of their core plus investment. Typically, core plus properties are financed at a rate of 50-60%, and investors generally target annual returns of 8-12%.
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An illustrative example of a core plus investment is a 20-year-old rental property, currently occupied by tenants, purchased with a 40% down payment. While the property is in decent condition, it requires updating in the near future. It is situated in a neighborhood showing signs of growth but is located further from the city center.
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Characteristics of Core Plus Investments:
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Risk Level: Low to moderate
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Reward Level: Moderate
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Timeframe: Long-term
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Primary Goal: Strong cash flow and solid growth
What is Value-Add Real Estate Investing?
Value-add real estate investing involves acquiring an existing property with identifiable potential for transformation.
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A prime example of value-add investing is fix-and-flips. In this scenario, a property in physical distress is purchased, and value is added by reconfiguring the layout, updating fixtures and finishes, or incorporating an ADU (Accessory Dwelling Unit) for extra living space. When executed effectively, the resulting property's value significantly exceeds its initial state, yielding substantial returns within a relatively short timeframe. Value-add investors typically target an annualized ROI of 10-15%.
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However, this enhanced ROI potential comes with increased risk. Value-add projects usually entail higher levels of financing, typically leveraging debt at rates of 60-75%. Additionally, compared to core and core plus investments, there is greater margin for error in value-add projects. Owners must oversee intricate renovation processes and secure quality tenants, demanding substantial knowledge, experience, skill, and time investment. Inadequate planning or execution can jeopardize the project, leading to diminished returns or even losses.
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Given these complexities, value-add investing is best suited for seasoned investors. Nevertheless, inexperienced investors can access its benefits through real estate syndication. We'll delve into syndication shortly, but for now, it's crucial to recognize that opportunities exist to leverage value-add investments, even for those lacking personal expertise to optimize returns.
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Characteristics of Value-Add Investments:
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Risk Level: Low to Moderate
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Reward Level: Moderate to High
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Timeframe: Short-term
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Primary Goal: Solid growth and stable cash flow
What is Opportunistic Real Estate Investing?
Opportunistic real estate investments entail embarking on new developments built from scratch, typically funded by debt financing ranging from 50-70%.
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Compared to other investment strategies, opportunistic investments carry higher risks and rewards. Much of the risk stems from the substantial upfront capital required to initiate the project. Even with substantial financing, substantial investment is necessary for preparing vacant lots, designing structures, construction, and marketing to potential renters. Returns on investment may take years to materialize.
Consider a new multi-family development as an example of opportunistic investing. It demands expertise in identifying ideal locations and designing appealing structures for contemporary renters. Navigating the building process requires insider knowledge and industry connections to handle zoning regulations and obtain permits. Additionally, assembling a competent team comprising architects, project managers, and builders is essential. Overseeing development from construction to lease-up phases demands personal time investment.
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In exchange for specialized knowledge, skill, time, and risk acceptance, opportunistic investors anticipate the highest annual returns on their investments, often exceeding 20%. Traditionally, professional real estate developers and private partnerships pursued opportunistic real estate investing. However, real estate syndication allows everyday investors to capitalize on established developers' expertise while mitigating risks. In the following section, we'll explore how syndication operates and how it democratizes access to high-reward deals for everyday investors.
Characteristics of Opportunistic Investments:
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Risk Level: Moderate
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Reward Level: High
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Timeframe: Mid-term to Long-term
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Primary Goal: Strong Growth with Solid Cash Flows
Diversify Your Core, Core Plus, Value Add, and Opportunistic Real Estate Investing with Hezekiah
We briefly explored the concept of real estate syndication for accessing more sophisticated investments such as value-add and opportunistic properties. Now, let's delve into how it operates!
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Real estate syndication enables individual investors to pool resources for a real estate project, managed by a syndicate sponsor. This setup provides expert oversight, minimizing risks, while ensuring passive returns for investors.
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Enter Hezekiah, a Southwest Florida-based syndication firm offering a unique Build-to-Rent Investment Concept! Here's how it works:
Our Build-to-Rent concept begins with a new development project, allowing investors to partake in opportunistic investments like multi-family developments for exceptional returns. Upon completion of the construction phase, investors can transition their investment to the core (or core plus) rental phase, reaping ongoing cash flow, tax benefits, and appreciation.
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Alternatively, investors can opt for a single-family value-add renovation for swift growth and then extend their investment into the core rental phase for long-term property ownership benefits.
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Prefer flexibility in your investment horizon? No worries! Investors have the option to cash out post the value-add or opportunistic development phase. With low investment minimums, you can diversify your capital across multiple projects for an instantly diversified real estate portfolio. Plus, our flexible investor options accommodate individuals, companies, or even retirement accounts.
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Here's the kicker: You can invest from anywhere globally, leaving the work to our local real estate experts. No need for personal developer relationships or managing construction projects. Hezekiah handles all aspects professionally, from tenant management to property upkeep.
Investing in real estate online with Hezekiah is a breeze. Simply sign up for a free account, complete your accredited investor verification, and choose your investments. You'll be leveraging your core, core plus, value-add, or opportunistic real estate investment strategy in no time!