What are the 4 investment strategies? (Part 1)
Core and core + are the bedrock of diversified portfolio and minimize risk.
June 20, 2015 BY IAN IPPOLITO
It’s crucial to understand the four strategies of real estate investing, because it’s the only way to truly understand your risks, and to create a diversified and safe portfolio.
The four strategies are:
Core: low risk (7 to 11% historic returns)
Core+: low to moderate risk (8 to 12% historic returns)
Value-added: moderate to high risk (10 to 15% historic returns)
Opportunistic: high risk (12% to ???% historic returns)
As you may have noticed, as the returns increase so does your risk. So being able to properly diversify among the strategies (at the right time) is crucial to protecting your portfolio.
Here's an explanation of each type.
Historic rates of return: 7 to 11%
Leverage: around 25%
Core real estate is the bedrock of a diversified portfolio. Its real estate that’s located in the strong demand urban center of major metropolitan areas (New York, Los Angeles, Washington DC etc.), and rented out to credit worthy tenants.
Due to the high tenant demand, core investments are almost as safe as bonds, but with much higher returns. Often the tenants (like a Starbucks franchise) are backed up with a rent guarantee from the parent company (Starbucks Inc.), which protects the investor if the tenant leave.
Unlike the stock market, core investments hold up extremely well in business cycle downturns. Here’s a comparison of core real estate to stocks. Notice how stocks decline in every business cycle downturn (every 3 to 5 years). But core investments stay positive, and only go negative in more severe financial crisis downturns (which occur about every 20 years)
Core investments use the most conservative leverage (0 to 40%), and invest in the least riskiest assets (The Big 4: office, retail, apartments, industrial). Their return is mostly from income (70% plus), and historically has returned 7 to 11%.
Core investments are the most "all weather" of the strategies, and have the longest window for good timing.
However, the tail end of a cycle is when returns are the lowest, so this is a good time to suspend new core investments. This is especially true at the end of the 18 year super cycle, when returns tend to go negative.
Ideal purchase times in the cycle are highlighted in yellow below. The earlier in the cycle, the more good properties are available, and the lower the risk. The later in the cycle, the opposite is true.
If you're looking for core investments, I've explored many options. Click here to see the best Core investments. (This is a private investor club-only article. Membership is free, but requires verification.)
Historic rates of return: 8 to 12%
Risk: low to moderate
Core plus real estate, is similar to core, but not quite as high quality. The property might be in the suburbs, or a secondary metropolitan area. The tenant may not be quite as high quality, or may not have a rent guarantee from high quality national company. Or it might involve a property type that is riskier than one of the big four, such as self storage, entertainment, medical offices, or student housing
Core plus investments are low to moderate risk, and return slightly more than core.
The timing is similar to core, except you should taper off a little earlier at the end of the cycle/super cycle, since it will experience losses before core does.
If you're looking for core plus investments, I've explored many options. Click here to see the best Core Plus investments. (This is a private investor club-only article. Membership is free, but requires verification.)
In Part 2, we'll look at value-added and opportunistic investments which yield higher core and core+. We'll also look at what's the ideal allocation of the four strategies for your portfolio.
Core real estate historic returns
Stock market historic returns
What are the 4 investment strategies? (Part 1: core and core+)
Should I invest in residential or commercial real estate? (Part 1: residential)
What's your opinion?
About Ian Ippolito
Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News and more.
Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.