Assessing the Risks Across the Most Common Multifamily Investment Strategies

There are multiple avenues to invest in multifamily real estate, each with its own risk-reward profile. Ground-Up Development, Value-Add, and Core represent the three most prominent strategies, catering to different investor goals and risk tolerances. These approaches provide multiple avenues to capitalize on the multifamily sector's appeal. In this week's newsletter, I'll detail these three strategies and explain how each compares in terms of risk and potential returns.

1. Core

Description: Core properties refer to high-quality, stabilized multifamily properties (e.g., 90%+ occupancy) in strong markets. Investors acquire these properties with only minor enhancements planned (e.g., light upgrades or operational tweaks) to boost value slightly. These deals have the fewest risks overall:

- Market Risk: Tied to broader economic conditions—recessions or oversupply in the market can pressure rents or occupancy, though less severely than riskier strategies.

- Operational Risk: Limited upside from major renovations means returns depend on steady performance and modest NOI growth (e.g., via rent hikes or cost efficiencies).

- Interest Rate Risk: Often financed with long-term debt; rising rates can compress cap rates and reduce resale value.

- Liquidity Risk: High-quality assets can be easier to sell, but buyers expect premium pricing, which may delay exits in a downturn.

- Upside Limitation: Minimal distress or repositioning potential caps return compared to value-add or development.

Return Potential: Moderate (8-12% IRR), driven by stable cash flow and modest appreciation.

Risk Profile: Low to Moderate Risk

2. Value-Add

Description: This strategy involves acquiring an existing multifamily property that is underperforming (e.g., low occupancy, outdated units, or mismanaged) and implementing improvements to increase revenue and value. Examples include renovations, better management, or raising rents to market levels. Value-Add investments involve all the risks that Core deals experience, with a few additions:

- Operational Risk: Success hinges on executing the business plan—renovations must be on budget and on time, and management must boost net operating income (NOI). Overestimating tenant demand for upgrades is a pitfall.

- Market Risk: The investment performance hinges on achieving rents that have never been proven on this specific property. A deep dive into local rent comparisons must be done carefully.

- Capital Risk: Unexpected repair costs (e.g., plumbing or structural issues uncovered during renovations) can inflate budgets.

- Vacancy Risk: High vacancies require excellent cash management during the renovation period.

- Financing Risk: Often uses construction loans to fund the repositioning. Delayed or even halted construction draws can jeopardize the business plan.

Return Potential: Moderate to High (12-18% IRR), driven by forced appreciation through higher NOI and property value.

Risk Profile: Moderate Risk

3. Ground-Up Development

Ground-Up Development involves acquiring land and constructing a new multifamily property from scratch. Developers oversee the entire process, from zoning and permitting to construction and lease-up. The risks listed under the Core and Value-Add strategies all apply, with a few more:

- Market Risk: Demand for rental units may shift by the time the project is completed (typically 2-3 years), exposing investors to economic cycles.

- Construction Risk: Delays, cost overruns, or supply chain issues (e.g., lumber shortages or labor strikes) can erode returns. Unexpected site issues (e.g., environmental hazards) add uncertainty.

- Execution Risk: Requires expertise in managing architects, contractors, and regulators. Missteps in design or permitting can derail timelines or budgets.

- Lease-Up Risk: New properties must attract tenants from scratch, and failure to stabilize occupancy (e.g., 90% leased) quickly can strain cash flow.

- Financing Risk: Development often relies on high leverage, with construction loans carrying strict terms and higher interest rates.

Return Potential: High (15-25% IRR or more), driven by creating a new asset at a cost potentially below market value.

Risk Profile: High Risk

Comparison Summary

Final Thoughts

Development has historically offered hefty rewards for taking on additional risk, with returns of 20% more than doubling the S&P 500's performance in a typical year. However, in today's environment, developers are struggling to make projects pencil out to the traditional 15-22% IRR as interest rate increases have significantly elevated debt expenses. Many development deals breaking ground in 2025 are likely willing to accept returns more commonly associated with Value-Add or Core strategies.

Value-Add investments offer an attractive balance of risk versus reward. With fewer environmental, market, and execution risks than Ground-Up Development, yet still delivering double-digit returns, this middle path has strong appeal. A typical Value-Add deal targeting 16% IRR outperforms the S&P 500's 30-year average of 9.9% by approximately 50%.

Core assets provide an excellent strategy for more conservative investors—particularly institutions, insurance companies, and pension funds—who prioritize predictable cash flow with moderate growth potential. While less spectacular in terms of headline returns, these investments offer stability and preservation of capital that can be essential to a diversified portfolio.

As you consider multifamily investment strategies, it's key to align your approach with your financial goals and risk tolerance. Whether you're seeking the higher returns of Ground-Up development, the balanced opportunity of Value-Add projects, or the stability of Core investments, the multifamily sector offers compelling opportunities across the risk spectrum.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.