Are you aware of the relationships between risk and return? It is essential for investors to understand this concept. The experts at Luxe Crowdfunding is here to make sure that you have the best advice when it comes to taking advantage of the best real estate investments. This is why we are known as one of the best real estate investment companies in the United States.
The Different Property Classifications
Let’s begin with the four broad categories that are distinguished by the degree of potential risk and return applicable to the property.
- Core: Generally considered to be a lower-risk/lower-return strategy, this approach uses relatively low leverage and focuses on stable, fully leased, multi-tenant properties within strong, diversified market areas. The properties generally do not require significant improvements or renovations.
- Core Plus: This approach also focuses on core-like properties, but with an increased opportunity for potentially improving the property’s net operating income through modest measures such as rent increases upon lease rollovers or by modest property improvements. This is generally considered to be a moderate-risk/moderate-return strategy.
- Value-Add: This approach is considered a medium to high-risk strategy which generally involves making relatively significant property improvements so that the market may assign a higher value to the property. Properties may be considered candidates for a value-add strategy when they exhibit management or operational problems, require physical improvement or suffer from capital constraints. This approach may offer medium to high return objectives.
- Opportunistic: Typically considered to be a high-risk/high-return strategy involving development properties, the redeployment of markedly underutilized properties or other extensive enhancements.
Best Real Estate Investment Classes
Properties can also be categorized into “class A”, “class B”, and “class C”.
There is no precise formula by which properties are placed into classes, but the breakdown is generally as follows:
- Class A: These properties are generally newer properties built within the last 15 years with top amenities, high-income earning tenants, and low vacancy rates. Class A buildings are well located in a market and are typically professionally managed. They typically demand relatively high rents and have very few deferred maintenance issues.
- Class B: These properties are generally older, tend to have lower income tenants and may or may not be professionally managed. Rental income is typically lower than Class A, and the properties may have some deferred maintenance issues. Generally, however, these buildings remain relatively well maintained. These are often properties that sponsor seeking “value-add” opportunities may tend to chase because through renovation and common area improvements the property can often be repositioned to be marketed at higher rental rates. Buyers are generally able to acquire these properties at higher cap rates (i.e., lower purchase price relative to net operating income) than for Class A properties because Class B properties are viewed as somewhat riskier prospects.
- Class C: Class C properties are typically more than 20 years old and located in less than desirable locations. The properties are generally in need of renovation, including updates of a building’s infrastructure, and tend to have lower rental rates compared to other local properties. Some Class C properties need significant redevelopment work before they can be expected to provide steady cash flows.
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