@Luke13735 to add a bit to the "cyclical" thought, I'd suggest this reading material:
https://www.naiop.org/en/Magazine/2...spx?_id=8B220B99966444FB9CEFCD7A07C9B37F&_z=z
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Secondary markets the ones you are calling "cyclical" can be extra punishing to investors - and timing them is actually more important than in primary markets.
For the record, Calgary is a "secondary" market. Lethbridge is a very small tertiary market so be careful. Small towns are not very good at diversification because they have extra operational stressers (good management / PM / trades / small market to draw from / limited growth prospects)
A good way to think of markets is about diversification in economic drivers. Both Calgary and Lethbridge will be driven by the same oil / energy economics. As you get into cities where there are very different mixes of businesses and industries that is where you find actual market diversification. I think the best proxy for this is the
Herfindahl-Hirschman
index (
HHI) - basically a number that determines industry concentration - less concentration is a stronger market.
It's great to see you thinking in terms of tranches of risk though. I would suggest taking a risk-adjusted return approach. Real estate is very asset specific but is broken into 4 risk-return categories:
Core: lowest risk / return profile, A-tenants. 5-7% return
Core plus: modest improvements required, strong B+ to A tenant profile. 6 – 9% return
Value add: deep improvements, some in place tenants, willing to take on substantial vacancy 10% - 15% return
Opportunistic: development projects, complete refurbishment, higher risk profile. 13% - 20% return
Good overview of above (page 104):
https://s3-us-west-2.amazonaws.com/static.crowdstreet.com/e-book.pdf
With direct real estate investment here are my general allocation suggestions:
- keep direct investment in real estate below 30% of total net assets (most direct investments are close to home, which are very closely tied to personal job so poor diversification ie. everything goes down at same time)
- avoid >70% leverage
- try to invest in 3 different markets at minimum
- if low experience, stay in core and core plus investment categories only