Investors Need Unique Types of Real Estate Portfolios
Real estate is a historically stable investment, but that doesn’t mean all real estate portfolios are generic or easy to manage. And if you’re a real estate investor, managing an asset well can be challenging, especially as your portfolio grows. That’s why many investors choose to hire a professional asset manager: someone who specializes in maximizing returns on multiple properties at once. If you’re considering hiring your own asset manager or working with an existing one, here are the four types of professionally managed real estate portfolios they typically offer:
Investors look for different types of real estate opportunities. The four most common are core, core plus, value-add, and opportunistic investments. Portfolio types can all have their own unique investment strategy. Each type will then have different risk and returns characteristics, management requirements, and expertise needed to be successful.
Core Types of Real Estate Portfolios — 4-8% IRR
A core portfolio is the most stable type of real estate investment. It consists of properties that are held for the long term and whose value tends to rise over time. Core portfolios are meant to provide stability and reliability in an otherwise unpredictable market, so they’re often made up of retail or office buildings in good areas with high occupancy rates.
The core strategy aims for minimal debt and high occupancy in good areas — ideally a 4-8% internal rate of return (IRR). Because you’re focused on long-term stability, your returns may not be as high as those from other investments, but they will be more consistent and reliable over time. Core portfolios are especially helpful for diversification purposes of investors whose primary goal is retirement income.
Core-Plus Types of Real Estate Portfolios — 8-12% IRR
Core-plus portfolios are a blend of core and value-add properties and provide an internal rate of return between 8-12%. They offer investors a good middle ground between riskier property types and more conservative ones. Core plus portfolios typically contain a mix of 50% to 80% core assets and 20% to 50% in value-add properties.
The best way to determine whether you’re interested in this type of investment is by asking yourself how much risk you’re willing to take on in your portfolio. If you want something that’s more stable, but still offers some growth potential, this might be right for you. However, if you’d rather spread out your bets among different types of investments with different rates of return—and higher risk profiles—you may want something else altogether.
Value-Add Real Estate Portfolios — 12-16% IRR
Value-add (VAD) is a strategy that focuses on buying underperforming properties and improving operations. The goal of this approach is to increase rent, decrease expenses, and raise property value.
In contrast to core portfolios that purchase already well-performing properties, value-add investments are more complex since they require additional due diligence and monitoring of performance metrics.
While the risk involved in value-add is higher than core-plus strategies, it’s lower than opportunistic portfolios which invest in distressed or highly distressed assets. Value-add plays are ideal for investors who want higher returns but don’t want the high risk associated with an opportunistic portfolio.
The exit strategy can be varied depending on your timeline or goals as an investor; some may choose to hold onto their investment until it reaches its maximum potential while others may exit sooner if they need liquidity from their capital—i.e., there are other opportunities within their portfolio that could provide better returns than what their existing investment would contribute at that time frame.
Opportunistic Portfolio — Over 16% IRR
Opportunistic portfolios are highly ambitious investment strategies that can be suitable for many types of investors. This portfolio type is for the thrill-seeking investor with the highest risk tolerance and patience. Opportunistic real estate provides an opportunity for long-term property improvement and will take several years before returning any profits, but when it does, it offers some of the highest rates of return on investment in commercial real estate investing. While there are no guarantees, this portfolio type can bring returns as high as 20% or more annually.
To achieve this level of return, an opportunistic investor will take advantage of distressed properties that need to be fixed up before they can be rented or sold. The goal is to find properties with an upside that outweighs any downside risks involved in their purchase and rehabilitation—an ideal scenario for investors who like taking on risk but also want a maximum potential return for their investment dollar.
Opportunistic investments often require significant upfront capital but offer the possibility of higher returns over time than other types of professionally managed real estate portfolios due to their unique nature: buying distressed assets (for example foreclosures), which tend to have low purchase prices; fixing them up with renovations or improvements; re-leasing them at higher rates; and finally selling them off once market conditions have improved significantly enough for buyers to feel confident about paying premium prices again.
Opportunistic portfolios aim for an IRR above 16% because they require more time than other types of professionally managed real estate portfolios. However, this extra patience means that investors can expect their investments to last longer than traditional buy & hold properties which tend towards lower returns from month to month due to their higher risk profile (lower cash flow).
Choosing the Best Types of Real Estate Portfolios
When evaluating your options and comparing investment opportunities, it’s crucial to understand the different types of real estate portfolios available. The following is a list of things you should consider before selecting the best option for your situation:
- Understand the risks involved in each type of real estate portfolio and comparing different investments opportunities.
- Know your financial goals and determine if they align with one type of portfolio more than another.
- Determine if your risk tolerance matches any real estate sector or asset class (i.e., high-rise office buildings in Manhattan vs. single-family homes in Los Angeles).
- Evaluate your financial goals and risk tolerance, as well as your timeline, economic cycle, and real estate market cycle to determine which type of professionally managed real estate portfolio is best for you.
- Understand which times are most suitable for investing in each type of property and determine if these periods align with yours (i.e., an investor who wants to buy income-producing properties during their retirement years would be ill-advised to invest heavily in multifamily housing during an economic downturn).
- Consider the availability of capital and capital markets in relation to your ability, to execute an investment strategy that aligns with your risk tolerance and timeline.
Choosing the Right Investment Manager
Granted, this is a lot to think through and can be overwhelming, but you worked hard to earn your money, so you should diligently think about how to best invest it. This long list of factors should be talked through with your CPA or financial advisor before bringing them to your investment manager.
Although you may not know the difference between the availability of capital for a core-plus property and an opportunistic one, when you invest in a group, you may have an investment manager who will. When you hire an asset manager, they will employ a strategy that is tailored to meet your needs based on expertise and experience. Your asset manager can use their talents and resources to decrease your risk and elevate your returns whether that be through syndication or a fund.
Your portfolio is the heart of your investment strategy and returns. It’s what you’re counting on to grow your wealth and provide you with the lifestyle you deserve. How do you know if you’ve picked the right one? For investing help, you can always reach out to us at invest@eikoninvestments.com.
Happy Growth.
