WHAT ARE OPPORTUNISTIC INVESTMENTS?
Opportunistic strategies target highly distressed properties that require major renovations. They also involve the development of raw land, into residential or commercial properties.
This strategy is the riskiest, because it involves the use of high leverage (50 to 80%), the improvement plan is much more complicated than “value-added”, and susceptible to surprises. Additionally, there are usually significant periods of construction when no income can be generated. And often, income can only be slowly built up once that period ends, and may never be built up at all.
About 70%-100% of the return of an opportunistic strategy comes from appreciation of the property, rather than income.
Historic rates of return: 12% plus
WHAT ARE THE CHALLENGES?
Value-add properties may be outdated or rundown and require physical improvements due to neglect or owners lacking the capital to make improvements. Value-add properties may also have operational issues due to poor management and typically have a higher vacancy rate – around 50 to 80 percent leased – than other assets of a similar size in their neighborhood.
These properties have the potential to achieve higher returns after increasing income with the right kind of physical upgrades, better management, added services or more effective marketing. They can also be more lucrative after reducing and optimizing expenses. These operational and capital improvements add value beyond routine physical upgrades, and can attract new tenants, improve retention of existing tenants and generate higher rents from both segments. When the right value add property is purchased in the right market, higher returns are realistic with a manageable level of risk.