There are many different types of common investment strategies that take into account key elements such as risk, active or passive investments, growth, and a host of other factors. Real estate investors, however, typically follow one or more of the four main property investment strategies: Core, core-plus, value-add, and opportunistic investments.
These strategies in large part can determine an investor’s risk profile, as well as the location, quality, and type of assets held in his or her portfolio. While the lines between each strategy can be a bit blurry, we’ll broadly define each class to give investors a better understanding of these investment strategies, as well as touch on the pros and cons of each.
What Makes up a Core Real Estate Investment Strategy?
Core investments form the foundation of a strong and diversified real estate investment portfolio. These assets are typically high-quality commercial properties that provide steady income with low risk. Hallmarks of these properties include new or top-tier buildings with premium finishes in premier locations in primary or secondary markets. Occupancy is high or at capacity, with prime creditworthy regional or national tenants locked into long-term leases.
Assets can span a range of classes, including large multi-family apartment complexes, high-rise office buildings, or retail strip centers with notable anchor tenants. Investors seeking stability, low risk, and steady returns to the tune of 4 to 8 percent often focus on core real estate investments. These investments are often used as a means to preserve capital rather than to see long-term asset appreciation. However, financial requirements for core investments can be high due to the nature of the real property assets that meet this description.
What Is a Core-Plus Real Estate Investment Strategy?
Core-plus real estate investments often mirror core investments, especially for solo investors who are maximizing their financial reach. Core-plus investments are properties that might be located just outside of an urban core or slightly away from a city’s busiest submarkets. Buildings tend to be a bit older, with slightly dated finishes, but they still have strong occupancy with quality creditworthy tenants. Properties might have modest vacancy rates or have several tenants with leases set to expire in a year or two – factors that can bump up the investment’s risk profile.
Core-plus investment properties can include older strip centers, modest-sized class A, or larger class B apartment buildings. Core-plus properties may require upgrades or repairs, which can create unpredictability in operating expenses and an increase in risk. These properties can provide experienced investors with opportunities to leverage their knowledge and potentially increase cash flows through stronger management and by optimizing operations. In exchange for the heavier lift, investors typically seek returns around 8 to 12 percent, as well as some asset appreciation.
What Are Value-Added Investments?
Investors with a great deal of prior real estate experience often seek value-added investments because they can use their insight and capital to reposition assets and generate increased cash flow.
Key characteristics of value-added investment properties include fair locations, dated finishes that need upgrading or modernizing, mid-range to high vacancy, and deferred maintenance issues that need to be addressed in order to bring the property up to current standards. Physical improvements could include new paint, carpet, finishes, lighting, mechanical systems, or even major structural changes, such as updating exterior aesthetics to reflect modern architectural styles.
These minor and major capital improvements can significantly increase the execution risk associated with value-added real estate investments, as well as increase investor’s overall debt load. Investors comfortable with increased risk, as well as those seeking returns between 11 and 15 percent, often pursue value-added investments because they offer the potential for more upside through greater returns and modest to strong asset appreciation.
What Are Opportunistic Investments?
Opportunistic investments are often synonymous with ground-up developments. They have the highest risk profile and least predictability. Although execution risk is at a premium, so too is the potential for returns – as much as 20 percent, although returns could be delayed for several years for new construction.
While many opportunistic investments are ground-up builds, the category also can include struggling properties that have high vacancy and debt. These properties require major capital infusions and a total repositioning in the market. They are best suited for investors who have long investment horizons, access to ample capital for improvements or to fund new builds, and who are comfortable with high levels of risk.
The Bottom Line
These common real estate investment designations can help investors find and assess investment opportunities that match their investment strategies, tolerance for risk, and expectation for returns. Investors may choose to allocate capital across multiple strategies, or they can focus on the one strategy that best suits their investment objectives.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.