Core, Core Plus, Value-Add, Opportunistic

What’s the background?

Commercial real estate investing can be broken down into four strategies: core, core plus, value-add, and opportunistic. These terms describe the risk, quality, and strategy of commercial real estate and its investors.

What’s the catch?

Real estate professionals use these terms liberally, and nobody agrees on the exact definitions.

Got it, let’s start with core …

The term “core” refers to real estate located in high-quality locations with high-quality tenants that is purchased with little to no debt. Investors typically like to compare these types of equity investments to bond investments … 7%-10% annual returns with little variability. 

In commercial real estate, core investments typically have a high-quality tenant with a lease guarantee (like Starbucks or Walgreens). The lease is typically long-term (30+ years). Multifamily core investments are located in the best parts of town, are fully leased, and need little to no work (stabilized). 

In both commercial and multifamily, a core investment should be purchased with less than 40% debt.

What about core plus?

Like core, “core plus” real estate has high-quality tenants, is located in great parts of town, and is purchased with little debt. The difference? Core plus real estate refers to properties that are slightly lesser quality than core properties and are purchased more aggressively, with more debt.

Cash flow in a core plus property might be more variable and typically has more upside than in a core property. Investors in core plus properties expect a 9% to 13% annualized return. An investment can be considered core plus with up to 60% debt.

Let me guess, value add investing is higher risk than core plus?

Precisely. Value-add real estate investing is considered to have moderate to high risk. A value-add investment typically has considerable upside potential. At purchase, a value-add property might have low occupancy or considerable capital expense needs.

Value add investors typically want to see between 13% and 15% annual returns. They will use up to 80% leverage at purchase.

How does opportunistic investing compare?

Most real estate professionals consider opportunistic investing and ground-up development as synonymous. 

Opportunistic investments are typically made with as much debt as a bank will allow. Investors typically want to see annualized returns greater than 20%. However, most if not all of the cash flows from an opportunistic investment will be paid after year three.

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