What are Core, Core Plus, Value-Add, and Opportunistic Investments?

The risk and return characteristics of a real estate investment are described by the terms core, core plus, value-add, and opportunistic. Below,  let’s discuss core investing and the other types of appraisals.

Depending on the physical attributes of the property as well as the amount of debt used to finance the project, these types of appraisals range from conservative to aggressive in nature.

A building may have a variety of physical characteristics, including its size, location and size of its lease, the credibility of its tenants, and its structural integrity. While a project's debt load is also an important factor to consider when it comes to capitalizing on the project since it impacts the risk profile of the investment and affects the return on that investment.

Core Real Estate

Investing in core real estate is one of the safest and most secure investments available. Investors who prefer a steady income and are conservative should consider these opportunities. Consequently, the income generated by these properties is also low, because of the low risk that these properties present.

This type of property requires very little maintenance. Generally, long-term leases are used for the tenants occupying the property, so you don't need to be actively involved in the ownership.

Stock market investors associate the term 'core' with income. An investor who invests in core property is looking to reduce risk while generating a steady income. An alternative to bonds, core investments are typically purchased and held by their owners with minimal assistance.

The average return on core investments is typically between 4% and 8% annually due to their relatively low level of risk. It is more likely to produce income rather than major price appreciation, as returns tend to come in the form of income.

No matter what type of property type is purchased, core investments should have less than 40% debt. Consider taking a look at a real estate investing guide to familiarize yourself. Commercial real estate investment portfolios often begin with core investments.

Core Plus Real Estate

Low to moderate risk investors should consider these properties. Adding better tenants, upgrading a few things here and there, and improving management can result in increased income and growth. Real estate that is core plus is typically top-of-the-line and situated in city centers that are considered to be the best.

By improving the property, improving management efficiency, or improving tenant quality, property owners can generally increase their cash flow of core plus real estate funds. The properties in this category are also high quality and in good condition, similar to core properties.

Despite the moderate risks associated with core plus real estate, there are some disadvantages, one of which is the unpredictable cash flow. Participating in the improvement process and not delaying improvements are two ways to deal with it. An ever-increasing emphasis is placed here on operational efficiency and effectiveness.

Investors seeking some capital growth and a more risk-tolerant approach might benefit from core plus investment strategies. Most investors expect to achieve returns between 8% and 10% a year by using the leverage of 45% to 60%.

Value-Add Real Estate

In their current condition, some properties are extremely lucrative and in excellent shape. It is not the case with value-added real estate. A property of this kind needs to be added value in order to be profitable.

The ability of value-add properties to increase in value has made them popular as growth investments. There are a few advantages to this option, depending on whether or not the investor is comfortable taking moderate to high risks.

Value-add requires a greater amount of capital expenditures to make improvements to the property compared to core plus. Through renovation and redesign, Class B & C buildings are more likely to appreciate than income-producing buildings.

There are usually vacancy issues, management issues, or deferred maintenance problems in these buildings. Commercial real estate investment strategies such as these require deep knowledge of the market, careful planning, and daily management on the part of the owner.

Investors reap the benefits of cash flow and price appreciation once renovations are complete and the property has been stabilized.

Opportunistic Real Estate

This is considered the riskiest investment of all. These properties are much more complex than value-add real estate, even though they have similar growth potential. The first three to four years are often a time of no returns for investors.

A return on investment may take three years or more for opportunistic investors on complicated projects. In order to be successful with these strategies, you need a team of people with years of experience. Opportunistic investments include ground-up developments, the acquisition of empty buildings, land development, and the repurposing of buildings.

The amount of debt that a bank will allow is typically the maximum amount invested in an opportunistic investment. An annualized return of more than 20% is typically considered desirable by investors.

Investors who make an opportunistic investment must have a high-risk tolerance and be patient because most, if not all, of their cash flows will come after year three.

As soon as the value is added to an opportunity property, it typically has very little cash flow but can generate a tremendous amount of cash flow if it's properly managed. Leverage is typically used by opportunistic investors of at least 70%, but it can differ depending on how much they are able to borrow. 

Why are these Investment Strategies Important?

In terms of risk and return expectations, these designations provide information that can help individuals and institutions invest in commercial real estate. Investors can also choose a property and manager based on their own strategy, attitude toward risk, investment objectives, and investment timeframe.

Unless you are familiar with the four strategies, you won't be able to determine whether each firm you analyze has a potential risk and return goal. You need to know which option fits your client's portfolio best if they are looking for the highest returns available with their capital.

For a deeper appreciation, here are the top five considerations for investing in 2022. Understanding the differences between these four strategies is essential if you plan to invest in real estate.

Reach out to our team of financial experts to learn more about core plus real estate funds. Email us at general@saintinvestment.com or contact us at 949-881-7128 at Saint Investment Group today!

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* Information in this message, including information regarding targeted returns and investment performance, is provided by the sponsor of the investment opportunity and is subject to change. Forward-looking statements, hypothetical information or calculations, financial estimates and targeted returns are inherently uncertain. Such information should not be used as a primary basis for an investor’s decision to invest. Investment opportunities on the Saint Platform are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Please see additional disclosures here.
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