These are all terms used for defining the risk and return of a real estate investment.
Risk and return are major components in investments. You must understand their correlation because you need to maintain a balance between the two as a successful real estate investor.
It may sound cliché but the lower the risk, the lower the return, and vice versa. Understanding real estate investment strategies Core categories and others like Core-Plus, Value-Add, and Opportunistic can help determine profit from your commercial real estate venture.
The Four Main Real Estate Financing Strategies
Investment strategies for commercial entities fall into one of four major categories:
- Core
- Core-Plus
- Value-Add
- Opportunistic
Become familiar with each because they can help diversify your investments depending on risk and return. It is especially critical of specific points in the market cycle as they help you stick to a level of risk you are comfortable with.
However, what criteria are used to define these strategies?
The differences between these categories
To find out where each investment may fall, look at the following factors:
- The physical condition of the property and whether it is great, requires repairs soon, poor, or requires urgent rehabilitation repairs right now
- Whether the property is an industrial, office space, multifamily, or any other type
- The amount of leverage and debt
- The location of the property and demand among potential tenants
- The terms and length of the current lease in place—think short term versus long-term leases
With that taken care of, it’s time to take a deep dive into each of these real estate strategies for beginners and what they mean to your profitability.
Real Estate Investment Strategies Core
A Core property investor is one looking to generate stable income at very low risk.
Core real estate properties require very little TLC from their owners and are usually purchased and held as an alternative to bonds by some investors. This is the closest you can get to passive investing when you are directly purchasing a property.
The core property needs little management, and long-term lease credit tenants usually occupy it. Such properties offer investors a consistent and stable cash flow.
As a core investor, expect anywhere between 7 and 10 percent annualized return and use between 40 to 45 percent debt to capitalize the transaction. Most of the expected return comes from cash flow rather than the appreciation of the property.
However, remember to account for capital structure and physical characteristics as you determine your investment profile. Core assets that leverage 80 percent are no longer considered core investments. A higher leverage increases return and the property value fluctuates. A 10 percent property value decline might violate the lending terms and lead to default and a foreclosure.
Core-Plus
We associate this strategy with income and growth in the stock market and is usually low-to-moderate risk.
A core-plus property owner can increase their cash flow by making light improvements to the property, addressing management inefficiencies, or increasing tenant quality. Core-plus properties are well-occupied and of high quality.
However, cash flow for a core-plus real estate property is less predictable than that of the core investment. This type of property requires your participation. A 10-year-old apartment building with suitable occupation rates but requires light upgrades is an excellent example of a core-plus investment. Such a property will offer ample cash flow but some of it will be deferred for maintenance such as parking lots and roof repairs.
A core-plus investor puts in about 45 to 60 percent leverage and expects to achieve returns within the 8 and 10 percent annual average. To find out more about how to calculate leverage and returns, and what they mean to you as an investor, make sure you sign up for the Real Estate Masters Virtual Summit. Get to find out more about how you can transform your real estate venture into a predictable, reliable growth machine from industry titans.
Alt-text: real estate Master’s Summit publicity material
Value-Added
In the stock market, value-add is synonymous with growth and it is a moderate to high-risk strategy.
A value-add property usually has no to little cash flow during acquisition but offers the potential to produce a massive cash flow amount once a value is added. Such properties are:
- Struggling to maintain occupancy rates
- Grappling with management issues
- Requiring deferred maintenance
- Struggling with all three problems
If you are interested in such a property, have deep real estate knowledge, understand how to create and follow up strategic planning, and oversee the property daily.
An outstanding example of a value-add real estate investment is an apartment building that has not been renovated for years and with below-market rents. Such properties might have a 20 percent vacancy rate and are not well managed.
A value-add investor should expect to use anywhere from 60 to 75 percent leverage to create 11 to 15 percent in annual returns.
Opportunistic
A synonym for growth in the stock market and riskier than value-add propositions.
An opportunistic investor is taking on one of the most complicated projects and might not realize a return on the investment for three or more years. Essentially, this is a corporate real estate strategy that requires experience spanning years and a team of professionals to achieve success.
Examples of opportunistic investments include ground-up development, acquisition of an empty building, land development, and repositioning the building from its former use to another use. Such properties have no to little cash flow during purchasing, but they offer great potential for massive cash flow once you add value to the structure.
The opportunistic investor should expect to utilize about 70 percent or more depending on the ability to raise debt. For example, banks will not lend over 50 percent for land development. As an opportunistic investor, expect to gain the highest annual returns on your investment, usually a figure that is over 20 percent!
What Strategy is Right For You?
It is important you know the difference between real estate investment strategies Core, Core-Plus, Value-Add, and Opportunistic because the actual risk and advertised risk are usually very different. The conservative investor might focus on generating income while those with a bigger risk appetite can wait for a longer time. Between the four strategies above, there is an investment strategy for virtually any type of individual investor!
Make sure you learn from industry experts to choose the best strategy for you. Online summits are your chance to learn from the real estate superstars. Grow your business dramatically by signing up for a seminar today.
