3 Major Phases of Real Estate
Think about the different steps that go into constructing a building from the ground up. A project this big requires team work, collaboration, extreme organization and a will to execute. Essentially, there are three major phases of when investing in real estate: development, value-add, and stabilization. Each phase is then composed of sub-phases. In total, many different steps are involved, and each step has an accompanying level of risk before the first day of returns.
In general, the level of risk involved should yield the same, if not an even greater, return. It is safe to say that each sub-phase under development carries risk, but keep in mind that each case is unique. The development phase, from a ground-up construction perspective, includes holding periods which can span from two to four years. In short, any period between the initial investment and day one of seeing returns holds risk. In a ground-up construction development project, extensive planning and execution are necessary, thus it only makes sense that more risk will be involved. If a property with some of the building construction already developed, less planning is involved. Having a foundation can be more beneficial than starting from scratch. Nevertheless, the potential return for developing a ground-up construction plan is likely to be high because people and tenants are attracted toward new and upcoming things. Again, each project is unique with its own set of goals and calculated risk.
This phase encompasses strategy. Take for instance purchasing an apartment building, but to maximize a return that equals or outweighs the risk, some remodeling or rehabbing is necessary. This is where value-add comes into play. The overall goal of this phase is to reposition a property to a higher price point, aka appreciation. Please see the article titled “Benefits of Investing in Real Estate” for more information regarding real estate appreciation. The risk factor revolves around money and time it takes to re-develop and remodel a property and the value received from the updates through rent and property value increases.
Investors are always looking for good opportunities to capitalize. In this phase we will explore the attractiveness of an unstable property, and an investor’s pursuit to stabilize the property resulting in potentially higher returns. One reason why investors target unstable properties is because they are cheaper compared to stabilized properties. Usually unstable properties require renovations, have below market rents and have higher vacancies. An investor pursuing an unstable property has confidence that the property can be transformed or stabilized.
Before you choose which type of real estate investment to pursue it is critical to explore and finalize your own investment needs. City vest can help you through extensive onboarding where we explore your needs and match ideal investment opportunities to best satisfy and maximize potential returns.