Core, Core Plus, Value-Add, and Opportunistic Investments: A Detailed Guide

While investing in commercial real estate you come across a few common terms, those are Core, Core Plus, Value-Add, and Opportunistic. These terms define the level of risk profile, quality, and return potential of an investment property.  Also, such real estate strategies are suitable for indirect investment into commercial properties via funds, or Real Estate Investment Trusts. These terms also define the physical characteristics such as length, in-place lease terms, physical condition, and location of the land. 

As a real estate investor, you must know every investment strategy in detail. Let’s consider these investment strategies one by one.

Four types of Commercial Real Estate investment strategies

The requirement of every real estate investor is different, they have different risk tolerances, different rate of returns, and time horizons. So, here are the various aspects of the categorization of the investment property. 

1. Core Real Estate investment strategy

Core investments are the most stable and lowest level risk strategy. These are also known as A-type asset classes, that are new and furnished, and are located in urban locations with quality tenants. 

Core real estate assets provide predictable, low leverage (40%- 50%), and steady income. Hence they have low maintenance and property management costs. 

The main benefit of Core properties is that they provide inflation-adjusted returns. Furthermore, they are benefited from negligible foreclosure risks and provide consistent performances throughout the business cycle. 

The best example of Core commercial real estate services are the office spaces that are already rented to a large, established organization and high-rise retail shop. As they are rented for long-term leases they provide a long-term predictable rental income with minimal risk. They have little to no chance of major appreciation and expect annual returns in the range of 4% – 8%. 

Core commercial property creates the building blocks for a commercial real estate portfolio. For example, a 300 unit 5-story multifamily community in Miami, FL was built in 2015 with an average rent of $2,700. These properties suit best investors who prefer stable income and preservation of capital.

2. Core-Plus Real Estate Investment strategy

In comparison to Core properties, Core-Plus properties provide slightly higher risks and higher returns. It is quite similar to Core properties but with a slight difference in location and returns. 

Core-Plus properties are located in a good but not great location, with great tenants, slight modifications, and low to moderate vacancy rates. Buying a property with a Core-Plus strategy involves a lease in the short term thus resulting in vacancy risk. Hence, investors tend to look for higher returns due to increased chances of risk. 

Core-Plus properties give an annual return of 9% to 13% with a combined package of income and growth. Core-Plus properties are 10 to 20 years old, hence due to the age, these properties require a little up-gradation which results in less unpredictability in operating expenses. This rental property is for investors looking for little risk with some upsides. 

These properties deliver returns based on rental cash flow along with capital appreciation. The best examples for Core-Plus property are The Lex property at Downtown, Vancouver, and Jasper Industrial Income Tax Fund.

3. Value-Add Real Estate Investment strategy

Investing in real estate with a Value-Add strategy involves a greater return with moderate to high risks. The main objective of the Value-Add investment is flipping and fixing property at a good price. It involves renovating and converting properties suitable to the market standards with more debts. Value-Add properties are usually 30 – 40 years old properties hence require higher renovations and redevelopment ranging from minor to major.

After the up-gradation, the market value of the property rises with more rental income hence resulting in higher passive cash flow. Furthermore, it generates 13% to 15% annualized returns resulting in execution risk of implementing the project.

Value-Add investments are for commercial real estate investors looking for greater capital growth with moderate-high risk tolerance. Hence, to minimize the risk nearly 80% leverage is used to limit the maximum amount of capital at risk. And this is made possible by increasing the risk percentage and return potential on the investment. 

An example of Value-Add property is the 225 multifamily unit vintage community of Jacksonville, FL of 1975. This property is 92% occupied with $6,500 per unit capital improvement costs. 

4. Opportunistic Real Estate Investment Strategy

Opportunistic real estate investments are the riskiest category with less predictable cash flow. However, they can generate the highest return if executed properly. 

These properties usually involve major repairs or complete repositioning of the asset along with the highest level of debt and vacancy. The renovation period can consume long periods offering zero cash flow opportunities during that time. Hence, opportunistic real estate investors need to have the patience or a backup plan that can sustain them for some time.

Opportunistic investment properties include all types of asset classes including apartment buildings, multifamily buildings, office spaces, and REITs invest assets. Though it has the highest risk level, still it generates the highest return usually more than 20%. 

The opportunity investors are much more speculative than other since they wait for the appropriate opportunity arises to balance the risk-reward level. This estate investment trust REIT involves acquiring a distressed and struggling property and repairing it thoroughly to achieve the highest return. 

To execute an opportunistic investment the investors must possess excellent managing and property experience. The main benefit of opportunistic investment is diversification of your portfolio and also a reduction in market exposure. Commercial real estate investors looking for maximum return and the highest risk tolerance can opt for opportunistic investment strategies. 

Why is it necessary to understand these strategies?

Commercial real estate investors must have a vivid idea of the categorization of these strategies before investing. It makes you understand the risk/reward potential so that you can take your own decision as per your requirements. In order to become a pro in the real estate market, you must know your preferences and select the best property as per your choice. To get the highest return on your hard-earned money you must be well aware of the risk/reward potential of your selected property. 

Bottomline

Commercial real estate investment is an excellent investment vehicle if executed accordingly. You can earn capital depending on these four strategies and by choosing the best fit for your investment property. 

However, as always prior to any investment you must do your due diligence for achieving the maximum benefits. If you are a conservative investor then you can opt for Core or Core-Plus investment which generates high-quality properties with low leverage. But, if you are looking for a long-term property with high-risk tolerance then value-add investment and opportunistic strategies can be the best option for you.