Every investor has their own objectives, risk tolerance, and timeline set for their portfolios. Some investors might have a short-term investment plan and prioritize passive income. Others might have long-term investment plans and have the financial security to take on riskier investments. This makes having a “one size fits all” investment strategy impractical and outdated.
Instead, investors can use a variety of strategies to suit their needs and goals. What strategies they choose to use largely depends on their own personal financial goals, their risk tolerance, and time horizons. The larger real estate market can also affect which strategies work best. Some investors choose to perform their own, independent due diligence before employing a strategy to ensure the investment meets their personal requirements and that their chosen strategy is the right one to use for this asset.
There are four different types of strategies: core, core plus, value add, and opportunistic. Each is described in detail below.
Core investing is considered the “safest” or least risky form of investing. For some investors, it acts as the bedrock of their investment portfolio. This strategy includes buying and holding stable assets. These are characterized by their high quality, low vacancy, and strong markets or locations. An example of this type of asset would be Class A multifamily units in a primary market. Properties under this investment strategy also tend to have positive cash flow from the start and may command the lowest interest rates from lenders.
These high-quality assets come at a price. They tend to cost more money to invest in and offer the lowest potential return on investment when compared to other assets. There’s also a smaller chance for significant capital gains. Investors can expect an average potential return on investment of 4-8% annually.
Core properties are often found in the holdings of REITs, mutual funds, and other full-time professional investors. Core investors tend to favor yield over appreciation. This strategy is good for investors with an aversion to risk, who prefer income and stability over capital gains, and have a short-to-medium term financial timeline.
They also view commercial real estate as a safe place to invest their capital, in addition to the potential hedge against inflation. Both experienced investors wanting to preserve their capital and newer investors, looking to diversify their portfolio, may be found using this strategy.
This strategy is similar to core but carries slightly more risk for a slightly higher potential return. Investors using this strategy look for assets that are still mostly stable and appealing but have the option to add value and enhance returns. Properties in this category may have minor maintenance issues, be in a somewhat dated condition, have low to mid-range levels of vacancy, and have local or regional tents on medium- to long-term leases. They also tend to be in good, but not great, locations in primary and secondary markets. An example would be a Class B multifamily property.
These investments tend to have a slightly higher return and offer a potential return on investment of 8-12% annually. Core plus investments are a good fit for any investors who are willing to risk a little in order to improve returns. They also tend to have the means and the patience to improve the property and accept some variations in annual returns over the holding period. These investors often have a medium-term financial timeline for their financial goals.
Value-add strategies are higher in risk than core or core plus strategies. Properties usually need major renovations, repositioning, or lease-up stabilization. This includes dated buldings, mid- to high levels of vacancy, and tenants whose leases are expiring soon with some degree of uncertainty about their renewal prospects. In terms of location, value-add investments can be located anywhere between marginal and great markets. It is their financial, physical, or operational issues that present risk and opportunity.
Leasing is often considered an important part of a value-add strategy. Successful brokerage teams are able to market the property effectively and attract strong tenants in the process. This helps increase the property’s value over time alongside the other improvements made to the property.
Investors using this strategy usually choose between two different methods. If they are looking for appreciation, they tend to make the needed improvements in order to sell quicker. If they are looking for balance of appreciation and yield, then they hold the asset for five to seven years, which gives them enough time to execute this method. They also tend to favor returns from appreciation over yield and may wait to sell the property later rather than sooner. If they want to capitalize on appreciation, then they look to sell when market conditions are favorable, but sooner rather than later.
In return for this increase in risk, investors using the value-add strategy typically expect a return on investment averaging 13-20% annually, which is usually a mix of income and property appreciation.
This type of strategy tends to be the riskiest, but also offers a chance for the highest return of the four strategies. Investors using this strategy tend to see out properties that need a significant amount of work, such as those in need of large-scale renovations or suffering from high vacancy rates. New developments are usually included in this category as well.
With so much work going into the improvement of the investment, the asset can yield the highest returns, about an average return on investment above 20% annually, but also carries a high level of risk. Investors typically hold onto their properties for three to seven years. This makes opportunistic properties a good fit for investors with long-term financial timelines, high risk tolerance, and the financial means to ensure years without any income from that particular property.
There are several popular strategies depending on the investor and their portfolio. These include buy and hold, wherein an investor finds a stabilized property, purchases it, and continues its operations. The investor then holds the asset long-term until the optimal time to sell.
Which strategy is the most effective largely depends on other factors, such as market conditions, the current state of the economy and an investor’s goals. As an investor, you can use the real estate cycle to determine which strategy might work best for your asset given the current phase and your risk tolerance.
Both active and passive investments are popular among investors and wealth managers alike. The difference comes in how involved the investors become with their assets. In an active approach, an investor is typically more hands-on and involved in managing their portfolio and assets. With a passive approach, investors tend to outsource certain parts of the investment process, such as purchasing property, to organizations such as REITs and private equity firms.
Most investors use a mix of these strategies, depending on the markets, their goals, and financial plans. These strategies become especially important when looking at what to do during different phases of the real estate market cycle. For those looking for properties in dynamic markets with strong economic indicators, consider investing with Avistone.
We are a rapidly growing commercial real estate investment firm, focusing on the acquisition and operation of multi-tenant flex/industrial properties and the acquisition and asset management of hotel properties nationwide. Investors who choose to invest with us have the opportunity to purchase equity shares with the potential to receive preferred returns and capital appreciation.
In order to provide the best possible outcomes for our investors, we acquire properties located in strong markets with historically high occupancy rates, proven demand, and the potential for consistent in-place cash flow. Avistone also focuses on asset and property management to provide superior service to tenants and guests as a key to the success of our investment strategy.
Since our founding in 2013, we have acquired 26 commercial and hotel properties totaling more than 4 million square feet of space in California, Georgia, Texas, Florida, and Ohio. Contact us to learn about our most current offerings.
*Important Disclosures:
This communication is intended solely for accredited investors as such is defined in the Securities Act, and is not intended as an offer to sell, or the solicitation of an offer to buy any securities or ownership interests. The opinions and forecasts expressed herein are solely those of Avistone, LLC, as of February 24, 2023, and subject to change. Actual results, future events, predictions, circumstances and events will vary and be different from those set forth herein, and there are no guarantees that any positive or successful results, express or implied, by investors will be realized. Avistone specifically disclaims any right or obligation to provide investor returns at forecasted levels. Avistone’s track record from 2013 to December 2022; no guarantee of future results. The performance information of Avistone’s prior projects has not been audited by any third-party. The track record metrics reflect the weighted average performance of all our clients, and not every investor experienced exactly these same returns. Any and all evaluations for investment purposes must be considered in conjunction with a final Private Placement Memorandum (the “PPM”); all prospective investors are strongly encouraged to read all “risk factors” in the PPM. Further, some of the initial information provided above contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve numerous risks and uncertainties, and investors should not rely on them as predictions of future events. Investments in private securities contain a high degree of risk and often have long hold periods. They are illiquid and may result in the loss of principle. Avistone’s strategy may not occur due to numerous external influences.