How many real investment strategies are there? Which ones are the best? Ask real estate investors, and you’ll get a variety of answers to both questions. The “right” answer for you will depend upon what your investment goals are. Do you want to be involved in every phase of the deal, or simply a contributor of capital? Do you want a quick return on your investment, or steady long-term income. The answers to these questions, and a few others, will largely determine which options are good choices for you to consider.

Is real estate a good investment?

All investment comes with risk; but generally speaking real estate is a good investment. According to a CNBC study done in 2019 , real estate:

Consistently appreciates in value. There are cycles of downturns, surely, but over time, real estate values increase, yielding a higher long-term return than the stock market does.
Provides earnings that are less volatile in the short term than stock market earnings are. The real estate market changes slowly compared to other investments. This gives investors time to see what’s looming and time to react. For that reason, real estate investments are less volatile in the short-term than stock market investments are.
Allows investors to garner dozens of tax benefits.Investors can deduct many expenses associated with owning property, thereby greatly reducing their tax bill and increasing their return.
Is easy to finance. Lenders may finance up to 90% of the purchase price. This frees up capital for other investments. Historically-low interest rates increase this benefit.

What are the most common commercial real estate investment strategies?

Before jumping into the different strategies, one must analyze their appetite for risk. An investors ability to take on risk should directly be tied to their reward in an investment. For example, the higher the risk; the higher the reward. Below you will learn more about the different strategies and their risk-adjusted returns.

Core

Core investing is one of the safest strategies in real estate investing. Core investors want to “park” their capital in a low volatile investment where they can expect a modest return. These deals will typically yield a 5-8% return with no more than 40-50% leverage. You can expect these investments to be in great locations with creditworthy tenant(s) on long term leases. An example of this would be a CVS at a major intersection in a vibrant market on a 15+ year NNN lease.

Core-plus

Core-plus would be second in line on the safest real estate investing strategies. This route would typically be synonymous to the growth and income sector of the stock market delivering a low to moderate risk profile. An investor can expect an 8-10% return with no more than 50-60% leverage. An example of this would be an 12 year old stabilized office building with a quality tenant roster that needs minor upgrades to the building.

Value-added

Value-add investing is associated with a moderate to high risk profile. Properties will typically have high vacancy with very little income associated with the investment. Once the “value” is “added”, the properties have the potential to produce lucrative returns. Expected yields can be between 10-15% with an investor typically using 60-75% leverage. This investment strategy requires an experienced practitioner to be able to execute on leasing and keeping costs under control during the process. An example of this would be buying a multi-tenant industrial park with only 35% occupancy with deferred maintenance and short term leases in place with the tenant roster. Typically, the investment group would need to acquire the property, make necessary improvements, lease up the vacancy to stabilization, & exit the investment by either disposing or refinancing.

Opportunistic

Opportunistic has the highest risk profile out of all the strategies mentioned. These investments require the most experienced professionals in the marketplace to be able to execute. Investors may not see any return on this strategy for a few years. Due to the high level of risk, investors can expect a return of +15%. An example of this would be building a speculative warehouse, buying a vacant office building, or taking on a land development project.

The takeaways

1. Real estate is a very good investment for most people.

2. Real estate generally appreciates in value, generates more stable income than the stock market does, offers tax advantages, and is easy to finance.

3. Real estate investment strategies are often categorized by the investors risk tolerance

4. The best real estate investment strategy for you will be the one that fits your goals, your budget and your time constraints.

Conclusion

While different asset classes may perform better than others due to economic changes, there will be a demand for commercial real estate. Continual demand is a key factor in why investing in real estate is a good idea. Only you can determine which real estate investment strategies will work well for you. However, the wide variety of options give you the opportunity to find one that truly fits your investment goals and your personality.

For more information on how a Mississippi commercial real estate property can be an investment strategy for you, contact us today!