What criteria does a property need to meet to be considered an 'investment grade' property?
A property is considered to be investment, or institutional, grade if it attracts the attention of large institutional buyers, such as insurance companies, private equity firms or real estate investment trusts, or REITs. Since the market for real estate changes constantly, the precise threshold for what constitutes an investment-grade property is not constant.
Characteristics of Investment-Grade Property
Large properties tend to have more income-generating opportunities than small properties. Institutional investors are more interested in taller apartment structures or wider pieces of real estate. Most major lenders have size restrictions on loans for investment properties because smaller properties tend to attract less capital growth.
Investing in real estate is more lucrative when the property is already in position to generate revenue or can be modified to generate revenue with relatively little expense. This means many investment-grade properties are tenant-ready at the time of purchase.
Location is critical in determining real estate value. Most institutional investors are not interested in property located in the country, where buyer demand is low and scarcity is not going to drive up prices.
Like Any Other Investment
To be clear, real estate investing differs from capital market investing in many important ways. The principles that rule good investment decisions, though, are not any different. Investment-grade property, like a good stock, should be expected to increase in market value over time. It should represent an asset that is well-managed and provide value to consumers.
Investment properties carry inherent risks similar to stocks or bonds and should be diversified away whenever necessary. For this reason, investment-grade properties often make up only a small part of a larger real estate portfolio.