Real Estate Investment Strategies | Value-Add vs. Stable Income

When it comes to real estate and investments, perhaps one of the most important decisions any investor makes is when it’s  time to pursue a value-add strategy or to continue your endeavour by purchasing stabilised, income-producing properties.

So how does one choose between these two fundamentally different real estate and investments paths/ strategies for investing? 

In this blog, we will explore both strategies for investing, the risks and rewards of each, and help you choose which strategy best suits your financial and personal investing goals in real estate markets. 

Whether you are just getting started in the real estate and investments market or already manage a substantial portfolio, educate yourself and these options available in order to make the best, guided, profitable decisions moving forward.

What Are Value-Add Real Estate Investments?

You buy a real estate and investments property that is underperforming for a variety of reasons; it could be the management was poor, or the interiors were outdated. Once strategies are executed you can fix the underperformance for market valuation.

You may renovate units, rebrand the property, raise rents, or improve leasing in real estate and investments. The target is to ultimately help the property increase its net operating income (NOI), which in turn is expected to drastically increase the property’s market value in real estate and investments. 

What is A Stabilised Real Estate Investment?

Investing in stabilised real estate and investments are commercial real estate assets that are operating, are not in a lease-up phase with full occupancy (generally speaking 85% occupancy), and return cash flow as part of the initial investment. 

Stabilised properties usually have long-term tenants, established income, and often no substantial renovations or ongoing management.

In short, stabilised assets are the ‘buy it and let it work for you’ type of real estate and investment. They are the staple of conservative commercial real estate and investment strategies – with good reason. 

Stabilised investments offer dependable cash flow and lower risk profiles, both of which make them prime opportunities for investors seeking depressed rental income or to manage their assets steadily and systematically in real estate markets. 

Comparing Value-Add Real Estate Investments vs Stabilised Real Estate and Investments: 5 Key Perspectives

1. Investment Objective

• Value-Add: The value-added category is geared towards investors wishing to increase market value through active improvements and repositioning. The goal is growth—this means buying below market, enhancing the asset, and capturing that increase in value through rental income increases, or resale in real estate and investments.
• Stabilised: The stabilised properties in real estate and investments are meant for those who are focused on capital preservation and sustainable cash flow. The objective is to have passive cash flow from the property and hold the asset for the long term.

2. Risk and Return Profile in Real Estate and Investments 

• Value-Add: This approach is the high-reward end of real estate and investments that incurs a lot more risk first before realising a return. Fees associated with renovations, repositioning of the property, incur down costs with little to no return in the early days to pay the bills, and potentially unrelated tenant turnover months later can create financial strain. 

If executed as planned, value-add is capable of generating cash-on-cash returns in the 3%-7% range over a 3-5 year time frame. For those investors willing to take on a little more of a role/commitment, value-added real estate and investments have dynamic upside potential and a more favorable return curve.

• Stabilised: These assets represent a lower-risk entry point into real estate and investments and normally appeal to people more concerned with longer-term safety and less focused on rapid growth. 

With stabilised properties you are looking at cash on cash returns in the 6-8% range, and IRRs in the 12-15% range over a 10-year hold. These real estate market returns are very steady and can often correlate with the performance of solid real estate markets. 

3. Managerial Involvement in Real Estate and Investments

• Value-Add: Requires you to be actively involved in real estate and investments. From being on site to oversee renovations to strategies for new leases, the investor is essentially in charge of the asset’s NOI (net operating income) improvement. Keep in mind that this will usually be a full-time endeavour, especially while in the repositioning phases in real estate markets. 
• Stabilised: These real estate and investments are hands-off. There exist long-term tenants and stabilised operations, so owners can outsource managing the asset management real estate functions to third-party services in market valuation.

4. Impact of Market Conditions & Real Estate and Investments 

• Value-Add: These assets are much more in-tune with any external conditions in real estate and investments. Because value-add stays depend on market performance and increased rents, value ads perform much better when markets are experiencing upward trends in values. Investors pursuing value-add opportunities must consider the current and future real estate market to make decisions of when is the time to buy in real estate and investments. 
• Stabilised: Stabilised real estate and investments are typically more durable amidst any market turbulence. Because stabilised properties will have high occupancy rates and longer-than-average leases, they are generally more resilient to economic cycles and shifts in interest rates. 

This makes stabilised real estate and investments significant for anyone focused on consistency and income reliability as part of the larger whole of real estate and investments.

5. Exit Strategy and Timing in Real Estate and Investments 

• Value Add: Exit timing is built-in to the business model at the start. Most value-added real estate and investments will be built around the completion of the repositioning of the asset within 3–5 years. 

Once investors have turned the NOI by building or improving operations to drive net operating income, investors can exit at a premium, refinance, or hold a property with a more passive real estate and investment profile.  

This shortened cycle in real estate and investments is attractive for folks looking to scale equity or roll capital into the next project in a short period.

• Stabilised: This real estate and investments tend to be regarded as long-term positions. Accessing the compounding benefits of stabilised real estate and investments for the long-term yields benefits such as appreciation, amortisation, and inflation hedging.  

Stabilised real estate and investments are well suited to a long-term holder who would prefer reliable performance for many, many years, while stabilised assets form the foundations of conservative real estate and investments. Because stabilised assets are not built speculation around the exit strategy is usually more flexible and open to liquidity when required.  

Conclusion : 

Each real estate and investment approach depends on your financial goals, personal risk tolerance, and investment time horizon.

Success in real estate and investments requires more than just having capital available; it requires the ability to read changing real estate markets, shifting market valuation trends and the appropriate strategies to invest in both growth and income-based assets.  

At G Square Housing, our experienced team employs a data-centric disciplined approach to real estate and investments which includes both commercial real estate investing and long-term asset management real estate. Are you ready to explore smarter real estate and investment opportunities? Let’s engage and build a purposeful approach to move your portfolio forward.

FAQ’s

1. What are the top strategies for real estate and investments? 

The top strategies for real estate or investments are a value-add to push growth and stabilised assets to produce consistent income.

2. How can asset management real estate support investments? 

Asset management real estate can help maximise performance and returns in real estate and investments.

3. Why is commercial real estate investing good?

Commercial real estate investing gives reliable cash flow and appreciation in real estate and investments.