Receive a brief overview of the three primary investment strategies for real estate investing and a look at their relative risk/reward trade off.
- Just as there are many different types of properties available to investors, there are many investment strategies available. And none are better or worse, just different and different suited for different investors. The investors may have different goals, they have different risk tolerances. Probably speaking, there are three primary investment strategies. These are core, opportunistic, and value-added.
It's easiest to look at these in terms of risk-reward matrix. Now an example of a core investment is buying a recently built, brand new single family home that just has a new tenant renting from it already. And it's in a very mature rental market and you're confident about the near and long-term trends for the rent. These types of investments tend to involve lower risk because it's new, there's no construction, there's no rehab, and there's no lease at risk, you already have a tenant in there.
You only have to fill in a vacancy when somebody leaves. But expect that these kinds of investments are going to have lower returns because, well, it's more conservative. The lower the risk, the lower the return you're going to be faced with. And these are ideally suited for those that have a short investment horizon, those who seek a rental income that are stable, those that are looking to preserve their investments and want to minimize risk.
Now for those that are on the opposite end of the spectrum, the opportunistic investment strategy, here's an example, you buy some dirt that is in a secondary market where growth is not quite there yet, but you're betting on some future growth. And there's going to be a process to get the permits and actually build a home there in order to sell it or to possibly rent, but these types of investments, 'cause there is construction risk, there's permitting risk, there's market risk, and requires a lot of expertise, 'cause you got to now what you're doin', and there's execution risks.
These tend to be much higher risk and in return they tend to be much higher return potentials as well. So if you get those right, you get much bigger profits. But they involve a lot more risks. Now in the middle between those two, between the very low risk and the very high risk, the low return and the potentially high return one, is something in the middle that has moderate risks and moderate returns. And it could be something like buying an older rental that requires a little bit of fixing up, it's a little dilapidated, so it's not able to get the rent that it should be getting in the market, but you buy it, you may do some cosmetic work to it, some painting, some landscaping, and it could be some more significant work like rehabbing the kitchen or remodeling the bathroom or replacing the roof.
The more work that is involved, the more opportunistic it becomes. The less work, the more core it is. And that whole range in the middle is what you call the value-added. So which is right for you? Well, it depends on your goals and your skill level and your risk tolerance. However, hear how investors typically progress. They start with a rental property that's closer to the core side, lower risk.
And then as they get more experience, they work their way through the value-add and increase more of the risk, but increase more of the opportunity as well. So a lot of investors will start with a simple rental in a strong rental market. And then eventually they may go to a more speculative market and do some rehab work and do some fix and flips, but they don't usually start off there.
Note: This course uses data and example properties from the United States, but the concepts taught and tools provided are just as useful for any market.
- Determining if real estate investment is right for you
- Choosing a market and a property
- Using financing
- Strategies for first-time investors
- Real estate market cycles
- Valuing a property
- Analyzing your market
- How leverage impacts investments
- Real estate investment case studies