Three Primary Investment Strategies in Real Estate

No one strategy is better or worse, just more or less fitting for different investors with different goals and risk tolerances.

These are Core, Opportunistic, and Value-Added.

Core for the conservative investment

An example of core investing is buying a recently built, new single-family home that already has a tenant renting from it, in a mature urban market where you’re very confident the rental market demand.

These investments involve lower risk, with little to no rehab/construction risk, no lease-up risk (i.e., having to fill a vacancy), but the expected returns tend to be the lowest because it’s a more conservative way to invest.

These are ideal for those with shorter investment horizons, those who seek stable rental income and wealth preservation over maximizing returns, as well as minimizing investment risk.

Opportunistic for the aggressive investment

An example of an opportunistic investment is the purchase of raw land in a possibly up and coming tertiary market where the investor is betting on future growth. It may involve getting proper permits and actually building a new home from the ground up.

Not surprisingly, these investments involve much more risk and require more expertise and execution in hopes of getting outsized investment returns. It’s high risk, high return with a high level of work involved.

Value-added for the balanced investment

The middle of the road is the value-added investment. This is when an investor finds property in need of repair but is in an otherwise healthy market.

Maybe the property is currently achieving below market rents due to some fixable defects. The amount of work varies from cosmetic (e.g., painting, landscaping,) to significant (e.g., kitchen and bathroom remodels, roof replacement, etc…).

The less work involved, the more similar to core investing. The more work involved, the more similar to opportunistic.

It’s easiest to understand their differences by looking at their risk-reward profiles. 

In general:

• Core is lowest risk with lowest potential returns.
• Opportunistic is highest risk with highest potential returns.
• Value-added is moderate risk with moderate potential returns.

A young, aggressive investor with a long investment horizon may opt for more opportunistic investments while an investor nearing retirement age seeking stable cash flows may choose more core investments.

Investors may even adopt different strategies over time.

For example, an investor could follow this path along their investment journey:

• Start with a core rental deal to get some experience while minimizing early risk and complexity – getting an easy to rent property in a strong rental market to help them get real experience under their belt without taking on undue risk early on.
• Then do some low involvement value-added plays such as buying an older rental property that needs moderate renovations. As investors gain more confidence, they can take on more risk and complexity in their deals.
• And finally, work their way to the higher risk/reward opportunistic deals such as doing full tear-downs or building from the ground up. With more experience and confidence, they may opt for much more aggressive positions.

So which is right for you? It depends on your own goals, risk tolerance, and amount of work you’re willing to take on.