A Guide to Core, Core Plus, Value-Add & Opportunistic Strategies

As a father of two teenagers, I initially made an investment decision to save money more conservatively to mitigate risk as much as possible. What’s great about real estate is that there are multiple real estate investment opportunities and strategies that you can choose from to ensure that the investment fits your risk profile.

Some of the things that can affect the risks and returns are:

property location
age of building
tenant demographic/profile
type of debt placed on the property

Up to this point, the majority of the syndication deals I’ve invested in have been in the value add class.

These are similar to the fix and flip model where a sponsor group find assets (i.e. apartment complex) with an upside potential needing rehab ( light property improvements). But instead of renovating one unit, we’re talking about multiple units depending on how large the apartment complex is.

Besides value add, there are other real estate investment strategies used to classify the risk and return profile of a multifamily property. One of those types is a “core plus” investment which is what we’re going to highlight in this article.

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What Are Core Real Estate Investments?

Think of “core” in real estate as “income” in the stock market. The core investment strategy is for those looking for a conservative stable return with minimal risk. These properties are high quality/low risk assets and offer the most stable cash flows.

A typical core investment is characterized by:

low leverage (40% – 50%)
new or like new construction
stable income
excellent location
near full to full occupancy
high end finishes
no major renovations or operational issues needed

Due to the low risk profile, investors in core properties can expect annual returns between 4-8%. Most of this is likely to be generated through cash flow from the property rather than appreciation.

Core property example

Examples of core real estate include:

Class A multifamily assets, high rise office buildings
high end retail shopping center
a CVS drug store with a 30-year lease

What Does Core Plus Mean In Real Estate?

Think of “core plus” in real estate as “growth and income” in the stock market. They have a similar investment profile to core assets in that they’re also high-quality and well occupied situated in strong Class A or B locations.

Typically the main difference is that they offer more of an ability to increase cash flow through light improvements, increasing the quality of tenants and optimizing management and operations.

A typical core plus investment is characterized by:

high quality tenants
good (not great) location
10-20 years old
leverage (50% – 65%)
stable income
slightly dated finishes
low to moderate vacancy rates

Due to the slightly higher risk profile, investors in core plus properties can expect annual returns between 8-12% through a combination of income and growth.

Core plus real estate example

Core plus assets include:

A 200-unit multifamily apartment complex situated in a growing Houston, TX submarket built 13 years ago. This property is well occupied, in need of light upgrades plus stronger management to lower expenses and increase tenant retention.

It will produce ample cash flow but some of the cash will be used for future deferred maintenance such as roofs and parking lot repairs.

Pros and Cons of Core Plus Investments

Here’s a few core plus investment pros and cons relative to other options:

Core Plus Pros

Growth – Have the potential for appreciation due to a slightly elevated risk profile
Consistency & Stability – Are reliable income producers as they have good tenants on medium to long term leases.
Value – Typically good value can be found as most are slightly outdated which allows for rehabbing.

Core Plus Cons

Age – Usually exhibit wear and tear and/or deferred maintenance due to their age requiring capital replacing major systems or renovating interior finishes
Volatility – Active management is required to minimize variations in income as cash flow can be somewhat unpredictable.
Vacancies – May exhibit expiring leases in the short term which if not renewed, could cause a short term negative which could turn into a long term issue.

**How Core Plus Investments Differ From Other Strategies**

The four most recognized commercial real estate investment categories placed in order of increasing risk/return are:

core
core plus
value-add
opportunistic

As we’ve already discussed core investments, here are the differences between core plus and the other two.

Value Add Investment

As mentioned earlier, most of the syndication deals I’m personally invested in reside in the value add class which consist of Class B and Class C properties.

If you’re not too familiar with a syndication investment, check out this video:

The typical value-add property has:

dated finishes
fair to good location
medium to high vacancy levels
amount of deferred maintenance needed

The investment objectives of utilizing this strategy is purchasing an asset low enough where it can be improved via renovations and physical improvements to bring it up to core or core plus standards.

This process is called “forced appreciation“.

These investments tend to be a good fit for those with a moderate risk tolerance and a desire for capital growth. You can expect returns to be in the 10-15% range.

Is value add real estate more risky than core plus real estate?

The short answer is yes.

This is due to its moderate risk which also gives it considerable upside potential. Once renovations are complete and management efficiencies improved, real estate investors benefit from higher cash flow and price appreciation.

Opportunistic Strategy

Unlike the core real estate strategy, using opportunistic strategies pose the MOST risk.

Typically opportunistic investors are looking for the highest potential returns in “opportunity” which is usually property that is bought low with the hopes of selling high for a quick profit.

Opportunistic properties tend to have high levels of vacancy and debt possibly needing major repairs and/or a complete repositioning. They also include ground up development with minimal to zero initial cash flow with a larger potential later once the property has been rehabbed.

An example of this type of investment in the multifamily space would be new construction of an apartment building. Usually large amounts of capital are needed due to high construction costs which in turn hopefully attracts tenants that can pay an above average rent.

The key to success in this area is using a highly successful team with experience in:

land development
repositioning buildings from one use to another
ground up developments

Even though this strategy poses the highest risk, it also has the potential of higher returns vs the other different strategies mentioned (20%+).

Opportunistic investments tend to be a good fit for investors with the highest risk tolerance and/or longest time horizons.

Bottom Line

For those looking to invest capital in commercial real estate, the strategies discussed in this article can help set risk and return expectations. They also allow an investor to seek out a General Partner (real estate syndication sponsor) whose strategy, investment objectives and risk tolerance match their own.

For example, older investors may lean more towards a core plus strategy as they tend to prioritize income stability and preservation of capital.

On the other hand, younger investors may seek out a value add strategy as they seek a higher cash flow for growth.

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