In addition to asset classes, geographies, and operators, your diversification strategy with your passive investments should also include business plans. In this article, we’ll discuss three different business strategies that your operators will leverage to help drive more value to you, the investor.
Development Opportunities
Real estate development is one strategy that can be attractive to the growth investor. Development occurs when an operator takes a piece of land and builds a structure on it. These types of investments generally have longer time horizons before the investor sees any distributions, but this strategy can offer significantly higher returns than the other two options we’ll discuss today. In addition to timeline, the risk profile of development deals can be very different as there are several challenges the operators can run into during the development process like zoning, permitting, municipality challenges, and changes in supply costs during the longer timelines. It’s important to note that there are many phases of development, and it’s possible to invest in just one portion of the project like land acquisition, entitlements, construction, and lease up.
Stabilized Opportunities
Real estate investments in stabilized assets provide the most moderate and conservative returns across the three options because they are much more predictable and there are less opportunities to add value and overcome challenges. As the name suggests, these opportunities are fully leased, newly constructed or recently rehabbed properties in highly desirable locations. Institutional capital tends to flow to these types of investments as the risk matches the returns that these groups are targeting. There are still amazing tax benefits in this space, and capital preservation tends to be a larger focus with these investments. I plan to start investing in this space more and more as I move out of the growth phase of my investing career.
Value-Add Opportunities
My current, personal preference is with value-add opportunities as they offer all the benefits of real estate investing while also having shorter timelines and excellent returns. These opportunities are called value-add because the operator is planning on adding value through either increased operational efficiencies or through improvements in the existing assets. I like to compare these opportunities to a house flip on a much larger scale. Quite often the operators in this space will paint the exteriors, add a new sign, improve the leasing space, add dog parks or playgrounds, and then finish with some level of improvement in the interiors of each of the units. When the value-add process is complete, these assets can look brand new to potential tenants which drives significantly higher rents increasing the value of the asset.
Now that you know the difference between the three main business plans, you can align them with your individual investing goals which will get you one step closer from becoming work optional or leaving your W-2. In the upcoming articles, we’ll dig deeper into the different asset classes so can continue to add to your investing tool belt.
