It is a long journey to become an institutional investor. You have to know everything that there is to know about real estate.
Real estate investments are the best way to build generational wealth and hedge yourself against the adverse impacts of the economy.
Now, these investments are often of two types: residential and commercial. While residential is easy to understand, and you can get into it without having much knowledge or expertise, the return and stakes are lower than commercial real estate.
Commercial real estate involves various models and techniques for investing, cash flow distribution, and other things. So, it is a fairly technical field. For instance, if you are involved in syndication, you can use thewaterfall real estate model to establish cash flow and profit distribution.
What is the best type of real estate investment to help you scale your profitability?
So, here are some strategies and real estate categories you can invest in.
Core real estate
The standard investment strategy will help you create value as herein, you simply buy and hold the property that is preferably located in high-demand buildings.
Such an approach does not involve many risks, as you will retain these properties in the long run.
However, as you invest in such properties without incurring much risk, the internal rate of return on this investment tends to cap at 10%.
The main source of earning here is cash flow generation through renting and other sources rather than property appreciation.
The basic investment strategy here remains the same as the core real estate investment approach, but then you take on more risk in choosing the property as an investor. The risk is involved in the type of property the investors choose. Often these properties are compromised in a way, be it with the sort of location, the property's age, or its condition. There is some element of risk and compromise involved that the investor takes on to buy the property at a lower rate.
After purchasing the property at a lower rate, they fix the key problematic areas and hold the property.
It is observed that the IRR for the core plus investment strategy ranges between 10% to 14%.
This method is only considered by investors that can take more risks, and in the end, they may earn more rewards.
It is a form of investment wherein, to generate a single bit of cash flow, the investors must execute capital to reach profitability.
In many cases, an investor considers the value-added method when the projects are often stuck or require more capital than the initial investor calculated. For instance, under such a model, investors buy properties whose construction has halted owing to a lack of funds. The investors pump in the money, complete the construction, and then generate the cash flow.
It is also observed that the value-added method requires a major risk, which is why many consider syndication and using the waterfall real estate model to manage the deal.
The primary appeal is that the buildings can sell for much higher than initially purchased, as the standard IRR is 15 to 19%.
So, these are some investment strategies commercial real estate investors adopt based on their capacity to take risks and reward expectations.