There are a variety of investment types, which all depend on the level of risk an investor is willing to accept, when dealing with property investments.

The safest of these investments are called “core” properties. These investment properties generally seek an internal rate of return of less than ten percent (10%). Buyers of core properties use a limited amount of debt debt, which is usually less than 50% of a property’s value. An example of a core investment would be a retail property with a solid tenant locked into a net lease of ten (10) or more years. Another core investment would be a fully leased office building in a historically strong market with a high occupancy rate, such as Midtown Manhattan.

After core properties, the next-safest investments are called “core-plus.” These generally seek an internal rate of return of ten percent to thirteen percent (10% - 13%). Buyers of core-plus properties often use slightly more debt than core investors, usually from 50% to 75% of a property’s value. Core-plus investments are relatively safe, but provide the owner with an opportunity to increase the internal rate of return, in exchange for taking on slightly more risk. For example, a buyer may acquire an office building that is well occupied, but which has several leases expiring over several years. If the building is located in an office market that averages 90% occupancy, a property owner could reasonably assume that their building could consistently achieve that level. Core-plus investments also include the need for minor renovations, such as upgraded lobbies, common areas, bathrooms, or exteriors. After completing the necessary upgrades, a property owner could eventually raise rates, and in turn, increase the investment’s yield.

The “value-added” category is next on the real estate market’s risk-reward ladder. Value-added properties generally seek internal rates of return of fourteen percent to seventeen percent (14% - 17%). Buyers of value-added properties often use debt equal to more than 60% of a property’s value. Value-added investments carry some risk, and often rely on a buyer’s understanding of market trends, demographics, and potential tenant needs to be successful. For example, a buyer may acquire an older single-tenant office building with a short-term lease, in an office market with an average occupancy rate of 90% and with limited office construction. The buyer would allow the lease to lapse, and then spend several million dollars on renovations, raising the building’s quality to Class-A status, while making the building suitable for multiple tenants. Under that scenario, the building would likely gain at least 90% occupancy, and at much higher rents than before. That would increase net operating income, which in turn would increase the buyer’s internal rate of return. Some value-added investors concentrate on higher-yielding debt opportunities, such as mezzanine debt.

The riskiest investments are in the “opportunistic” category. These generally seek an internal rate of return of 18% or more. Buyers of opportunistic properties often use debt equal to more than 70% of a property’s value. Opportunistic investments, which carry the most risk, would include properties that have been foreclosed or which are about to be foreclosed, properties bought from distressed sellers (such as companies that have sought bankruptcy protection), or the underlying debt on properties owned by distressed sellers.

Other opportunistic investments entail large construction projects, and so-called property repositionings. For example, an investor may buy a large abandoned warehouse in a well-populated area and spend tens of millions converting it into a mixed-use property -- perhaps with retail and restaurants on the street level, office space on the lower floors, and residential condominiums on the top floor.

Increasingly, U.S. value-added and opportunistic investors are seeking higher internal rates of return by investing overseas. Value-added and opportunistic investments are also referred to as high-yield investments.

Some investors provide only debt for developers and other property owners, including ones that specialize in higher-yielding debt opportunities, such as mezzanine debt.