Welcome to The Real Estate Venturist. Every other week, this newsletter will give you a behind-the-scenes look at what it’s like to be a real estate entrepreneur. As always, this is not investment advice and merely my opinion.

Value-Add or Opportunistic? A Fresh Look at Real Estate Risk

I recently saw an interesting question online: What’s riskier: a value-add or an opportunistic deal? The consensus, at least according to that author, was that the value-add deal is riskier.

It’s not supposed to be.

There’s a well-known hierarchy of risk in real estate: core, core-plus, value-add, opportunistic. Expected returns generally follow the same path: roughly ~7%, ~12%, ~16%, ~20%+. If you’re taking on more risk, you should be compensated for it.

A core investment is typically a Class A, newer-construction property in a highly desirable market. Because you assume hardly anything will go wrong operationally, and because it shouldn't need much additional capital, this property is meant to be bought and put on auto-pilot. That safety and predictability make it the most expensive and lowest-yielding investment.

Core-plus takes things a slight step further by deploying more capital, perhaps through light unit renovations or modest common area improvements. The goal is to create marginal value with marginal risk and earn a somewhat higher return. Adding leverage also improves the return.

Value-add properties involve a heavier level of renovation. These assets are usually older, and the budgets are larger because units may need full gut renovations, and major systems often require replacement as well. Still, you’re not starting from scratch. The property already exists, permitting is easier, the plan can be executed faster, and non-recourse debt is available.

Opportunistic investing, on the other hand, usually means ground-up construction, highly distressed assets, or loan purchases. Development can carry more uncertainty, budgets can change quickly, and the long timeline leaves room for rents and expenses to move materially. A distressed acquisition brings its own hurdles. Legal action can impede your process, and hidden issues can blow your budget. This category warrants the highest return.

Less Risk in Opportunistic Deals?

This question of what’s riskier is fascinating. I should automatically say opportunistic investments are, yet I think I agree with those saying that value-add deals are—at least today. There are some caveats, though.

A seasoned developer who truly knows a particular market can eliminate many construction risks. I saw this firsthand while at a large private equity firm. One of our developer partners was skilled at keeping projects within budget. What he couldn’t do was change market forces. While the condominium market was imploding in 2008, it didn’t matter that the construction costs were on budget. Those units weren’t selling at prices that made the revenue side of the equation work.

The timing was bad for everyone who delivered new product in 2008. Even when construction risks get eliminated, market risks remain.

In the context of 2026 and beyond, I think the market risks for apartment development are minimal. There’s hardly any new supply coming, and the most in-demand real estate is newly built. A well-organized developer should be able to minimize the usual risks and, if they can find the right deal, deliver those 20% opportunistic investment returns.

Why Value-Add is the Tougher Path Today

Value-add can be riskier than traditional opportunistic deals because budgets are thinner and the payoff isn’t what it once was. The typical value-add plan involves renovating units, refreshing amenities, and addressing deferred maintenance. This work is usually done to a property that’s 25+ years old. In this last cycle, it was performed on many assets closer to 40-50 years old.

In the abstract, this should be straightforward. With a sufficient budget, unit renovations can be completed systematically as units vacate. Exterior paint, new roofs, signage, and amenity upgrades are usually manageable projects.

The reality is messier. Unlike development projects where numerous months are spent refining costs, investors have 30-60 days, max, to get this figured out. If the budget is too large, the deal won’t work at the market price and someone else will buy the property. There’s pressure to have a budget just big enough to still win the deal.

Older properties also have older systems, and these are frequently overlooked. Operators tell themselves, “We’ll only own this for 3-5 years, so why replace boilers, chillers, plumbing, out-dated electrical, or roofs?” It becomes a game of hot potato, and elongated hold periods are forcing many owners to address these issues when they don’t have the capital. Add in jurisdictions, like many cities in California, where new laws or an over-zealous planning department can introduce costs you never imagined, and the risk grows quickly.

A strong value-add operator can certainly execute and control renovation costs. The bigger issue comes at sale. Even if a property has been fully renovated, where all (or practically all) units have been nicely remodeled, amenities improved, and systems updated, it’s still an old(er) property. It won't command the ultra-low cap rates we saw last cycle because buyers assume more things will break and operating expenses will rise. In fact, the cap rate may be higher than you expect because there’s no “juice left to squeeze.” New construction, by contrast, may have limited rent growth, yet buyers assume expenses and capital are in check. Those assets get lower cap rates.

In the past, many operators completed partial value-adds and sold to another value-add buyer who still saw “the dream.” Those days are largely over, but they’ll return when market dynamics allow. There’s more certainty, even in an uncertain environment for new construction to sell.

The Risk of Future Revenue

Revenue risk is present for both strategies. A development that won’t deliver for three years is betting that rents and expenses will land at a specific point in the future. To minimize this, a developer can underwrite based on today’s rents and an expectation of future expenses. The market can still move against them, even with the best intentions.

Traditionally, value-add investors were in a better position. They were already leasing units, and could more reasonably add a $150-$300/month premium for upgrades in real time. I don’t think it’s that easy anymore. In rent-controlled markets with huge loss-to-lease when someone moves out, high-end renovations make complete sense. In higher-supply markets still dealing with occupancy issues, I’d worry that earning a sufficient return on investment to renovate units is even possible. I would test a handful of units first, not base an entire business plan on it.

How Much Risk is an Investor Taking?

Investors were spoiled when 20% multifamily IRRs were achievable across all stages of risk. That success muddied the waters between performance driven by real value creation and what was simply cap rate compression (i.e., market forces). Today, investors should spend more time making sure they’re being adequately compensated for the risk they’re being asked to take on. Not all value-add business plans are the same, and not all new properties are built by experienced developers. Understanding the nuance is key. Traditional value-add deals are hard to find, but those based on today’s rents and exit values that also address critical deferred maintenance are better positioned to succeed.