4 Multifamily Strategies You Need to Know

Whether you invest in multifamily properties through direct ownership, a REIT, or syndication, you’ll want to understand each of the investment strategies available to you. Choosing the right strategy is important to ensure you’re aligning yourself with an appropriate investment objective.

When selecting the right strategy, you’ll want to understand and balance your investment purpose, return expectations, and the level of risk you’re comfortable with.

The four major investment strategies for multifamily assets are Core, Core Plus, Value-Add, and Distressed/Opportunistic. Sponsors will typically have an investment mandate catered to just one of these strategies at a time. As you progress from Core to Distressed/Opportunistic the return expectations increase, but so too does the level of risk.

The objective of this post is to provide you with a general understanding of these investment strategies and guide you in making a more informed decision on which one is right for you.

In addition to describing the strategy we’ll discuss the general purpose for investing in each along with the risk/return profile.

Core Investment Strategy

The primary purpose of a core investment strategy is wealth preservation. It has the lowest risk relative to the other multifamily investment strategies, but the lowest return expectations as well. Properties that qualify for this strategy are typically Class A assets in well-located markets. The profit margins on these assets are extremely thin, and there aren’t many opportunities for an owner to increase rents because often rents are already at or near the top of the market.

You may consider investing in this strategy if you want exposure to real estate in your portfolio, but you don’t necessarily need current income or capital appreciation. Instead, you may be more concerned with capital preservation as an investment objective.

Core Plus Investment Strategy

The Core Plus investment strategy is the pursuit of stabilized investments with modest room for improvements. These assets may be Class A or Class B assets, but are typically not Class C. Some components to the building systems are likely outdated and need replacement, or there may be an opportunity to make cosmetic improvements to slightly outdated building features. The risk return profile of this investment strategy is moderate relative to the others.

When a core plus strategy is successfully implemented, the property should generate current income and light appreciation.

Value-Add Investment Strategy

A value-add investment strategy takes an active approach to creating value by making strategic improvements to properties with upside potential. The assets targeted for these investments are either mismanaged or undercapitalized, with the potential to reward the owner for repositioning them for income growth and value appreciation. Relative to the other investment strategies, this one carries a medium risk/return profile.

The value-add investment strategy is IronOak’s preferred strategy of choice. IronOak repositions each asset through capital infusions directed at enhancing property appearance, features, and amenities while eliminating operational inefficiencies. What we admire most about this strategy is that it mutually benefits our tenants and investors by creating value for both.

 A successfully implemented value-add strategy will create income growth and moderate appreciation.

Distressed/Opportunistic Investment Strategy

A distressed/opportunistic investment strategy is one that focuses on acquiring neglected properties in need of major repairs, or properties that the current owner is struggling to maintain and is pressured to sell.

While these assets may be offered at steep discounts, presenting the highest opportunities for returns, they also carry the highest degree of risk. Properties that are in distress typically require a substantial capital infusion and a proactive team and strategy for successful execution.

A distressed/opportunistic strategy may be ideal for someone with highly discretionary capital seeking an investment with potential for high capital appreciation.

Doing Your Due-Diligence

Choosing an investment strategy that aligns with your investment objectives is an important part of the process. The key is being clear about what you’re looking to accomplish, and realistic about how much risk you’re willing to accept.

Equally important is understanding who the sponsor is and how they hope to achieve these objectives. By example, if the sponsor is looking to implement a distressed/opportunistic strategy, you’ll want to know that they’ve sufficiently budgeted for the property’s planned improvements. You’ll also want to know that they have experience not just purchasing these assets, but that they have a track record of successful execution as well.  

While the risk/return profiles of each investment strategy are relative, there are no certainties with investing. A core investment strategy could be as equally risky as a distressed/opportunistic strategy if proper due diligence isn’t taken, or a poor business plan is implemented.

Beware that sponsors may also increase the risk/return profile by using high leverage (debt), which can act as an amplifier to potential gains and losses.

Overall, if you’ve decided that multifamily investing is right for you, choosing the right investment strategy can be a great starting point for narrowing down your field of sponsors.

If you’re interested in investing in multifamily real estate and would like to learn more about IronOak as your potential sponsor of choice, we encourage you to fill out our contact form and one of our team members will reach out to you for an introductory call.