Commercial real estate investing opportunities are often categorized into four risk-reward profiles, beginning with the lowest-risk core profile and ending with the highest-yielding opportunistic profile.
Investors typically gain more significant rewards as their risk increases, as determined by the business plan for a project. As such, opportunistic investments may offer a higher return if you're prepared to take on additional risk.
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In commercial real estate investing, opportunistic investments involve the greatest risk and are the least predictable. Additionally, they are likely to yield the highest returns. An investor with a high-risk tolerance or long time horizon tends to do well with opportunistic investments.
A high level of debt and vacancy is usually associated with opportunistic real estate properties. Repairs and repositioning may be necessary for the property and the development of opportunistic properties could also include ground-up projects where investors may not see any income for months or even years.
The capital gains potential of a property can be enormous once the value has been added, but opportunistic properties often have little to no cash flow at the time of acquisition.
Leverage utilized by opportunistic investors typically ranges from 70% to 90%, although the amount of leverage varies depending on the ability to obtain debt. A real estate investment made by an opportunistic investor can yield returns of over 20% each year.
Generally, opportunistic projects follow a similar process from the time they are purchased to when they are sold.
Investing in any stage of a business has its own risks and considerations, so investors should carefully review a business plan before making an investment decision.
Before any construction can begin, various project approvals must be obtained by the sponsor first. Obtaining government permits, getting zoning approvals, and testing for environmental impact can all be part of the process.
Often, the pre-development stage is the riskiest part of a project.
As soon as the sponsor receives approval, the architect, engineer, and contractor can begin working on the project. As the project reaches a break-even point, pre-leasing may begin in order to maintain consistent cash flow.
After the building has been completed, the sponsor will lease the space to tenants. Sponsors usually refinance projects with new debt or sell assets after they are fully occupied.
Usually, sponsors estimate investment hold periods between the start of an opportunistic project and the sale of the asset at three to seven years.
However, there have been instances where investment hold periods have been as short as one year.
It is typical for opportunistic projects to target an IRR of 15% to 25% and an equity multiple of 1.5x to 3.5x. While the return on investment (ROI) will depend entirely on the business plan's implementation.
The likelihood of an opportunistic project being successful depends on a few key characteristics, such as construction risk, lease-up risk, legal risk, timing, and cash flow problems.
Generating cash during construction can be challenging, but it can be even more difficult when tenants are not actively leasing. There is usually some debt to be repaid on opportunistic projects—if not all.
As a result, financial distress can jeopardize an entire investment if a project cannot generate cash flow.
On the other hand, a good business plan and the right timing can allow distressed and empty properties to be purchased and developed for far less than the market value of the completed asset.
In addition to apartment buildings and office buildings, opportunistic properties are found in all asset classes. A boom or bust return profile is often present in this category, as it is the riskiest.
It's possible for investors to earn a larger reward when they're willing to take on the higher risk of opportunistic investments. With a well-diversified portfolio that includes a variety of property types, locations, and sponsors, investors can minimize the risk of opportunistic projects while also having the potential to earn higher returns.
We take advantage of our decades of experience and our liquid assets to identify high-quality assets that are valued below intrinsic value. As a result, we seek to create strong economic assets for the communities we invest in while providing superior long-term, risk-adjusted returns for investors.You can learn more about real estate investing by filling out our online form or contacting us at 949-881-7128 at Saint Investment Group today!
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.