Making sense of different types of private-equity real estate funds can be daunting, but necessary, since your money is on the line. We’ll unscramble the facts so you can craft the best nest for your nest egg.
Private-equity real estate funds typically follow four general strategies when it comes to investment and payoff. Which you pick comes down to your tolerance for risk, your hoped-for returns and your investment timeline.
Core Investments: The bedrock of a portfolio
Core investments are best for those who want to play it safe — they’re unleveraged, meaning they don’t rely on borrowed money to make investments, and they typically invest in stable, already-fully-leased single- or multi-family buildings.
Core investment funds go for Class A investments — well-situated and professionally managed buildings — in gateway metropolitan areas.
These buildings need little to no work on the investor’s part, and thus, don’t present opportunities for large capital appreciation; instead, they provide a stable income with a long-term future.
- Core investments aren’t susceptible to the fluctuations of business and stock markets.
- Core investments offer low risk, but often low reward, too. Returns can be up to 8%.
Core-Plus Investments: Give your gains a boost
Those looking to up the ante a little go for core-plus investments, which use the same strategy as core investments, but which do so with some borrowed money. Core-plus funds are usually leveraged at between 20 and 30 percent.
Core and core-plus investments offer better liquidity than their higher-risk cousins because they’re more marketable properties — if you need to sell, you can typically get at least your money’s worth out of the property, fairly quickly.
- Core-plus investments can yield up to 10% returns.
Value-added Investments: Add risk and add return
Ratchet it up a bit further with value-added investments, which offer both medium-to-high risk and reward. Value-added investment funds usually involve buying or leasing land and making significant improvements — adding value — and selling at an opportune time.
Adding value can also take the forms of boosting efforts to lease vacant space to tenants who can pay higher rents, improving the property’s management, or lowering operating expenses.
These projects bear more risk because they’re not operating at their full potential at the time of acquisition, and require more of a time and monetary commitment from investors.
However, value-added investments strike a balance, offering cash flow from the beginning while providing the opportunity for capital appreciation.
Many home-flipping projects fall under the value-added category. These funds are usually leveraged at between 40 and 60 percent, and offer a higher return on the investment than core or core-plus strategies. Value added Investments can yield up to 12% returns.
Opportunistic Investment: Opportunity knocks
Finally, opportunistic investments — the strategy we use at RE/DEV — offer a high risk, but a high reward, if you play your cards right. Opportunistic funds involve picking up properties that need a lot of work, or investing in developments, raw land or niche property sectors such as vacation properties, student or senior housing, hotels, self-storage or manufacturing space.
Sometimes, opportunistic funds also involve unraveling existing but badly managed portfolios and picking them apart.
Existing buildings can be vacant at the time of purchase with this type of investment, or developers will want to build something brand-new, so cash flow is nonexistent at the start. Opportunistic investments need a committed investor with a long-term approach.
Interest rates tend to be higher for these types of projects.
Opportunistic funds can be leveraged at 60 percent or higher, but allow for substantial appreciation in value. Since RE/DEV doesn’t leverage our investments they may perform substantially better and significantly reduce risk. Opportunistic investments can yield 25%+ returns.