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FOUR DIFFERENT KINDS OF INVESTMENT PROPERTY TYPES

January 21, 2019Adnan Brkic

When appealing to investors through your idea about a certain property it is good to know which kind of different property investment categories that there is out there, so you know which category your property and idea falls under.

The main difference between investors is their willingness to risk and also the type of real estate portfolio that they have (if the investor has one), because of this the different investment property types is divided up according to risk and return.

In short- the riskier the investment property is, the more return is expected and the less risky the investment property the lower the expected return is.

The different investment types are divided up into four categories, which we will go through now.

CORE

This is the least risky of the four different investment types. The stereotypical example here would be an already existing office or residential building that is fully leased up (rented out), with loyal tenants and with a very low vacancy rate in the heart of the city. The property is also in no need of any bigger improvements. It is a safe bet to say that this type of property will continue to be attractive for tenants and demand little to no huge expensive improvements and therefore it comes with a low risk tag but also with a low return tag.

Investors that invest in this type of property want to have a stabilized cash flow, typically over a long period of time and focus less on the appreciation value of the building.

CORE

CORE+

This is an investment type that is much like the core property, but differ in some areas. This property has potential to be turned into a core property with a few changes.

The core+ property could for example have a slightly worse vacancy rate because of the tenant type, be a less well-managed property with big expenses, be in need of light improvements etc. The core+ property could have one or several of these negative points.

The positive points are that a core+ property is typically in an attractive neighborhood and still have a relatively steady and predictable vacancy rate that is more positive than negative, and that the building is typically in good condition and in no need of bigger renovations in the near future.

Investors that invest in this type of property want to turn a less stable cash flow into a fully stabilized cash flow with fewer small improvements, which also have the potential to create a slightly bigger appreciation value of the building after the improvements have been made.

CORE+

VALUE-ADD

This is an investment that is linked with a moderate to high risk profile. It is a property that is for example characterizes by having a very bad, even negative cash flow. It is a run-down property in the need of a big renovation, or it could be a property that had the use as an industrial building before but is transformed to a residential property, so a change of use.

This all means that the property in some way is in need of a big investment. It is not a stabilized property, but it therefore also provides the possibility for a big appreciation jump up and for the creation of a stabilized cash flow property if the market has been analyzed correctly, the numbers add up and that the market is at a good point in the market cycle.

Investors that invest in this type of property are more willing to take a risk for the potential of a bigger return both in yield and in appreciation.

VALUE-ADD

OPPERTUNISTIC

This is the most risky of the four investment types. The typical examples could be development of a vacant plot of land or tearing down a dilapidated building and building a new one. It is characterized by the simple fact, that before the project is underway, that the “property” has little to no value for generating cash flow, as it does not yet exist.

As it is the most risky it also represents the biggest potential for an upside, but it also represents the biggest risk, meaning that the guarantee of you getting your money back is also the lowest, but as with life there is also no guarantees in real estate, even if you invest in core property with a stabilized cash flow instead of an opportunistic development project.

OPPERTUNISTIC

The two categories of value add and opportunistic is where the developer is active, as these two investment types are their specialty, but more and more pension funds also seeks towards this type of investment as real estate has almost become something of a “sure” investment, where you always get your return, but the fact of the matter is that even if real estate investment is less risky and less volatile than the stock market it is still a very risky endeavor and especially if it is real estate development.

With this said, people will always need a roof over their head, and if one part of the market is in a drought, another part of the market can be growing. Therefore, adaptability and a spread of different investments strategies in different types of properties (products) will always be preferred as to lower ones risk if one area of the market is falling, then you also have properties in another part of the market that is growing.

DIAGRAM OF RISK/RETURN AND THE PROPERTY INVESTMENT TYPES

Thank you for reading.

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