As professional real estate investors and money managers, we understand that each of our commercial real estate investment partners has their own objectives, risk tolerance, and time horizon. Some investors may have a short term time horizon with passive income / cash flow as their major priority. Other, experienced investors, may have a longer term outlook and can afford to take some risk to build wealth.
As such, we believe that a “one size fits all” commercial real estate investing strategy is outdated. Instead we prefer to offer ways to invest in real estate that are consistent with a variety of strategies and work with our investors to understand which one is a best fit for their individual needs. We also encourage our investors to perform their own, independent, due diligence to ensure that a given investment meets their individual requirements (e.g. rental income vs. gains in market value), risk tolerance, and time horizon.
Broadly, commercial real estate investment opportunities tend to be correlated with one of four real estate investment strategies:
- Foundational
- Foundational Plus
- Value
- Speculative
Each of these commercial real estate investment strategies are discussed in detail below.
Foundational Investments
A foundational investment is the bedrock of a real estate investment portfolio. They are the least risky and most stable options through all phases of the economic cycle.
The foundational real estate investment strategy is characterized by rental properties with low leverage – typically 50% to 60% of the property’s value – little or no deferred maintenance, new or like new condition, full or near full occupancy, and strong tenants with long term leases. They also tend to have positive cash flow from day 1 and good to great locations in primary and secondary real estate markets. Because of their quality, they also command the lowest interest rates from lenders. But, these high quality assets come at a price. They tend to cost a lot of money so they also offer the lowest potential return on investment, typically 4% – 8% annually, and the smallest chance for significant capital gains. Examples of a typical foundational investment include a triple-net leased property to a credit tenant on a long term lease or a Class A Multifamily apartment building in a primary market. These are institutional quality investments that are often found in the holdings of a Real Estate Investment Trust (“REIT”), mutual fund, and other full-time professional investors.
Foundational investments tend to be the best commercial real estate investment for investors who have an aversion to risk, prefer income and stability over capital gains, and have a short to medium term time horizon. These investors tend to be older and their primary objective is to execute a hold strategy and preserve their capital. Or, they could be new investors who are just starting to build their real estate portfolio.
Foundation Plus Investments
Foundation Plus investments are one step above their Foundational counterparts in that they carry slightly more risk, but offer the chance for a slightly higher return.
The Foundation Plus real estate investment strategy is also buy and hold real estate characterized by investment properties with slightly higher leverage – typically 55% to 65% of the property’s value – minor deferred maintenance, somewhat dated condition, small to medium levels of vacancy, and local or regional tenants on medium to long term leases. They also tend to be in good, but not great, locations in primary and secondary markets. Because they carry a slightly elevated level of risk, Foundation Plus investors demand a slightly higher return, typically in the 8% – 12% range annually. Examples of a Foundation Plus Investment include a Class B Multifamily Property or an office building with minor vacancy and a need for some cosmetic repairs.
Foundation Plus investments tend to be a good fit for investors who have a small appetite for risk and those who have the means and the patience to accept some variations in annual returns. These investors tend to be middle aged individuals with a medium term time horizon.
Value Investments
Value Investments are the next step up the risk spectrum and they offer the chance for an even higher return for those that are willing to accept the additional risk.
The value real estate investment strategy is characterized by commercial properties with medium to high leverage, up to 75% of the property’s value, minor to major deferred maintenance, dated condition, medium to high levels of vacancy, and tenants whose lease are expiring in the near term with some degree of uncertainty about their renewal prospects. From a location standpoint, Value investments can be in marginal to great locations. It is their financial, physical, or operational issues that set them apart. In return for the elevated risk, Value investors typically expect a return in the 13% – 20% range annually and it usually consists of some mix of income and property appreciation.
Because this type of commercial real estate investments typically present with some level of operational issues, skilled operators can find exceptional opportunities to purchase a property at a discount to its replacement cost and improve/stabilize it before selling for a profit. For example, we like grocery store anchored retail centers in high traffic locations where we can use our operational expertise to re-tenant the property and add cosmetic enhancements to the facade.
Value investments tend to be a good fit for individuals with a medium to high degree of risk tolerance and a longer term time horizon.
Speculative
Speculative investments offer a classic boom/bust scenario. They carry the most risk, but they also offer the chance for the highest return. These are projects that could return multiples of the original investment or end in foreclosure.
The speculative real estate investment strategy is characterized by properties with high leverage (e.g. low down payment), marginal locations, significant structural, operational, financial, management or occupancy issues. Examples include the major reposition of a large property or a ground up new development that may require the owners/investors to go multiple years without the property producing any income. But, speculative investments can also deliver handsome rewards – in excess of 20% – for those that are successful.
Speculative investments tend to be a good fit for those individuals with the longest term time horizon, the highest risk tolerance, and the financial capacity to ensure years without any income from the investment. Even then, they should only comprise a small portion of the investor’s overall portfolio.
Interested In Learning More?
First National Realty Partners is one of the leading private equity commercial real estate investment firms in the United States. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
We offer investments in multiple property types that are consistent with all four strategies, but encourage our investors to do their own due diligence. If you would like to start investing in commercial real estate and learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrealtypartners.com for more information.
