Real estate is an investment asset class with many advantages for corporate investors due to the tangible and scarce nature of land and property. Businesses that invest to grow capital often turn to real estate for diversification, income and a hedge against inflation and stock market volatility. Real estate investments help to secure money to enhance organizational efficacy through cash flow generation and asset appreciation. There are also tax advantages unique to certain forms of real estate investment.
While real estate investments balance riskier investments in a diversified commercial investment portfolio, business professionals must examine the types of real estate assets and investing methodologies that match a business’ particular resources and objectives. An advanced business degree in real estate can equip business professionals with the knowledge to confidently make these real estate investment decisions.
What Makes a Good Real Estate Investment and Investment Portfolio?
Since real estate investments are illiquid and require moving capital from liquid assets such as stocks and bonds, real estate investments should offer a high likelihood of a return on investment greater than typical liquid investments. As a result, commercial investors should expect increasingly higher levels of potential return as risk and commitment of resources increase. To determine which investments fit business objectives, possible deals should be screened through real estate investment software using a process that involves both data analysis and due diligence:
- Data analysis: This includes comparing planned investments with previously successful deals over time and integrating third-party datasets for a holistic understanding of the most profitable opportunities.
- Due diligence: This involves gathering all relevant information, including building regulations, tax codes, title policies and government-issued documentation. Due diligence uncovers potential costs before a more intensive underwriting process begins, revealing a property’s legal and financial history.
Strategies Using Real Estate to Build Capital and Grow a Corporate Investment Portfolio
There are four fundamental approaches to real estate investment, each with a different balance between risk and potential returns. These approaches vary in terms of whether they are used for buy-and-lease for cash flow or buy-and-sell (short-term or long-term) for price appreciation. To simplify the guidelines, we apply their features to multi-tenant rental properties:
- Core: Buying and holding class A buildings that do not require significant additional capital investments and easily attract tenants adds value to a company’s holdings through cash flow and capital preservation. The rate of investment return is typically below 10%.
- Core Plus: This approach differs from Core in that the buildings typically involve more risk and involvement, with higher upside potential. While a building’s age or location may add risk, buyers can acquire the facilities for less money, and the right renovations and amenities can attract high-paying tenants. The typical rate of return is 10-14%.
- Value-Added: These investments are about making substantial changes to a property to reposition it to attract higher-value tenants. The risks include an extended timeframe for the parcel to appreciate to a value markedly above the initial purchase price for a substantial profit on the sale. The typical rate of return is 15-19%.
- Opportunistic: At the highest risk level, investors look for dilapidated or low-occupancy buildings requiring thorough renovations or added construction. Development/new construction is an extreme example of opportunistic real estate investment. The typical rate of return is 20% or higher.
Types of Commercial Real Estate Investments
Inflation protection, income and diversification are all reasons commercial investors turn to real estate. There are several ways to invest in this asset class, including direct investment in brick-and-mortar properties, debt investments backed by real estate and publicly traded real estate investment trusts (REITs) and debt-like instruments. Companies may use developed properties or raw land for industrial purposes, offices, retail, multifamily, hotels or other purposes.
Each type of exposure to real estate — private equity, private debt, public equity and public debt — has its advantages. However, combining their complementary benefits in a diversified portfolio is arguably the best approach.
- Private equity allocations are made directly in brick-and-mortar properties or indirectly in privately held companies that own and manage real estate. This type of investment offers potentially high returns with low volatility.
- Private debt allocations are opportunistic, with direct investments in debt secured by real estate or issued to companies focused on real estate, which offers commercial investors a stable income.
- Public equity allocations are made in equities of issuers backed by real estate investments, such as REITs. These allocations offer potentially strong returns with high liquidity.
- Public debt allocations include investments in preferred equity of REITs, convertible debentures, unsecured debt and preferred stock for stable income and liquidity.
The online Master of Business Administration (MBA) with a track in Real Estate program from Longwood University offers graduates the critical skills needed to pursue jobs in commercial real estate investing.
Students will gain relevant knowledge in courses such as Real Estate Economics and Development; Information Technology; Strategic Management and Business Policy; Leadership, Group Dynamics and Team Building.
The increasingly digitized world means online and remote work will impact real estate as well — a trend professionals should anticipate. Longwood’s program will not only equip graduates with the financing, planning and development expertise to succeed; it will also help them anticipate a more digital real estate space.
Learn more about Longwood University’s online MBA with a track in Real Estate program.