To the uninitiated, the world of commercial real estate investing can seem to be shrouded in unknown terms and mysterious metrics. While it’s true that some CRE deals are quite complex, the basic investment strategies are easy to understand.
There are three categories of properties you will strategically target as a CRE investor. They are core properties, value add properties and opportunistic properties. The category or categories you choose to focus on will be determined by your goals, your investment timeframe and your appetite for risk.
Core properties are in newer and well maintained buildings in high traffic locations. They require standard maintenance, but generally do not need significant capital-intensive improvements.
Pros: Most reliable cash flow. Lowest risk.
Cons: High price per square foot. Price can be barrier to entry. Could face significant competition from other buyers for these properties. Core properties are not likely to appreciate significantly.
Value add properties will be in somewhat less desirable locations than core properties and will often need improvements. This presents opportunity for the investor, however, as value add real estate has more potential for appreciation.
Pros: Potential to enjoy appreciation in value as well as cash flow.
Cons: Higher risk than core properties. May require capital investment to improve appearance, or investment in marketing. May be necessary to change perceptions of entire neighborhood order to maximize returns – which can take significant time, effort and funds.
Opportunistic properties have tremendous potential for appreciation, but also carry the highest risk. Investors in such properties may be starting out with an empty building in need of significant improvements, or even bare land.
Pros: Opportunistic properties provide the highest potential return. Completing a successful transformation of an empty building, a structure in poor condition, or bare land can yield significant profits. Additionally, you may not be competing with as many other buyers for these properties and, as a result, may be able to secure more concessions from sellers.
Cons: High risk. No in-place cash flow. Complicated business plans. Often involve significant financial leverage and less favorable debt terms than more stabilized properties.
So consider your goals and your appetite for risk. Opportunities abound in commercial real estate for investors of all kinds. A commercial real estate advisor at MontanaCRE can provide more detailed explanations of property types and investment strategies, as well as information about properties currently on the market. Get started today and discover how commercial real estate can benefit your investment portfolio.