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Opportunistic Investment in Real Estate

Opportunistic Investment in Real Estate, What Are The Risks?

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This article is part of our passive investors guide on real estate syndications, available here.

Opportunistic real estate investing is not for the faint of heart. Generally, with greater upside and return potential comes a greater risk profile. Opportunistic strategies lack the consistent cash flow aspect that makes certain types of rental real estate such a stable risk-adjusted asset class. The opportunistic game of real estate investing requires a ton of due diligence and strategic planning to even get past the first phase of evaluating whether the sponsor believes this investment opportunity is viable. 

In this article, we’ll break down what an opportunistic investment in real estate is, the risk and reward profile that comes with these types of investments, and we’ll compare and contrast it vs. the value-add strategy.

Key Takeaways

  • Higher risk comes with great reward or return expectations, which must be said about opportunistic real estate investments.
  • The returns can be quite larger, somewhere in the 20% plus IRR range, but the return comes with great variability as most opportunistic deals are more speculative.
  • This potential investment strategy is not suitable for you if you are naturally a more risk-averse investor.

Opportunistic Investment in Real Estate

Opportunistic real estate investments are more speculative, hence the word “opportunistic”. The types of real estate projects could entail simply renovating a highly distressed as-is property, the redevelopment of an existing structure, or a brand new development. 

Let’s now dive into a quick example of an opportunistic real estate investment.

Opportunistic Example

Let’s say a real estate sponsor purchases a vacant 100-key motel in a submarket of Atlanta, GA. The sponsor’s intended use for the motel is to redevelop and convert it into an 85-unit multifamily apartment complex. Apartment units are in high demand in this submarket, trading for close to $200,000 per unit.

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This project comes with its risks as it’s 100% vacant and will require some rezoning with the local municipality. It’s also going to take a large number of capital improvements to make it apartment-grade, but even once you get past all that, you must lease up all 85 units successfully. If the sponsor can execute the business plan, it can be a lucrative project as a stabilized apartment will be worth substantially more than the cost basis for the project.

Opportunistic Investing Risk vs Reward

risk vs-rewards

Higher risk comes with great reward or return expectations, which must be said about opportunistic real estate investments. The returns can be quite larger, somewhere in the 20% plus IRR range, but the return comes with great variability as most opportunistic deals are more speculative. 

This potential investment strategy is not suitable for you if you are naturally a more risk-averse investor. If you aren’t prepared to lose or can’t afford to lose some of your principal, at least from a mental perspective, to be able to detach, then this is not your investment strategy. 

Next, let’s compare and contrast opportunistic and value-add returns.

Opportunistic vs Value-Add Returns

Opportunistic investments returns out of the gate are projected to produce the highest return, and value-add is a close second. What differs substantially is the risk profile, as value-add typically is taking stabilized or relatively stabilized assets that already cash flow and adding value through physical and operational improvements. 

This means that the property already has a strong pulse and is likely already cash-flowing, and you’re just doing things to add value to the tenant base to improve upon it. That being said, an opportunistic real estate investment could yield an 18%-25% IRR, and a value-add deal could yield a 15%-18% IRR.

Frequently Asked Questions About Opportunistic Investing in Real Estate

The four main risks associated with real estate are the market/location, vacancy issues, property management, and bad debt.

Real estate investors fail because they don’t do a good enough job of stress testing their deals, creating a conservative projection for the project, being too speculative, or not having a clear exit strategy.

Opportunistic Investment in Real Estate - Conclusion

Investing in opportunistic real estate can be a great way to achieve outsized returns, but it does come with outsized risk. Before considering investing in any of the various commercial real estate investment strategies, whether core, core-plus, value-add, or opportunistic, make sure you understand your risk tolerance and make decisions with the long term in mind.

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