We’ve consistently talked about our light value-add approach and strategy to real estate. However, there are multiple strategies appropriate for different times and investors according to their level of risk tolerance and varying objectives and timelines. Real estate investment strategies fall into four segments according to risk, asset quality, and expected return.

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Core – Low Risk

Core property investors are typically conservative investors looking to generate stable income with very low risk. These properties generate stable and consistent cash flow from established, high quality tenants locked into long-term leases and their values tend to be the least volatile. These investments require no improvements or active management. They are as close as one can get to passive investing when buying properties directly. The majority of expected return is generated mostly from cash flow vs. appreciation. Investors expect to achieve between a 7% and 10% annualized return and use 40-45% debt for the acquisition. Investors typically acquire and hold this type of investment as an alternative to bonds.

Core Plus - Low to Moderate Risk

Core plus property owners typically have the ability to increase cash flows through light property improvements, management efficiencies or improving quality of the tenants. Similar to core properties, these properties tend to be of high-quality and well-occupied. Compared to Core properties, this investment requires active management and a higher portion of expected return will be generated from appreciation due to potential increased value from property improvements. Investors tend to use between 45% and 60% leverage and expect to achieve returns between 8% and 10% annually.

Value-Add – Moderate Risk

Value-add properties often are underperforming at acquisition in terms of cash flow and have the potential to see substantial increases in income through improvements in occupancy, rents, decreases in expenses through cosmetic, structural, and operational value-adds. Total expected returns are generated both from cash flow and appreciation. Investors tend to use between 60% and 75% leverage to generate annual returns between 11% and 15%.

Opportunistic – High Risk

Opportunistic is the riskiest of all real estate investment strategies. Opportunistic investors take on the most complex projects and may not see a return on their investment for the first few years. Ground-up developments, acquiring an empty building, land development and repositioning a building from one use to another are examples of opportunistic investments. Opportunistic properties often have little to no cash flow at acquisition but have the potential to produce a tremendous amount of cash flow once the value has been added. Opportunistic investors tend to use leverage of 70% or more and can expect the highest annual returns for a real estate investment, often over 20%.

Let’s connect to see how Bluefox Ventures can help you diversify your portfolio by investing in alternative assets like multifamily real estate.