A challenge for many people new to commercial real estate investment is in understanding the different segments or options for investments. Knowing the differences between Core, Core Plus, Value Add and Opportunistic will be critical in narrowing down investment opportunities to match your risk level comfort as well as the characteristics for the return on the investment.
Keep in mind, choosing a property based on location, capital structure and the physical condition and characteristics of the property is still critical.
Investors with a low level of risk comfort will generally find the Core real estate investments are a good match. The term "core" refers to income in the market, so think of core investments as steady, stable income producers.
When purchasing a property directly, these properties are designed to be self-supporting, with limited property and asset management requirements from the investor, as a sole or group owner. Additionally, these properties are already at a low vacancy level with steady, established tenants on long-term lease agreements.
The income level from a Core property will be steady. There will be a limited risk of a drop off in investment income, but also limited increase throughout the term of the investment.
Core real estate investments are typically very low leverage (up to 40%) and returns are expected to be up to an average of 10% per year.
Core Plus Investments
With the steady income of a Core investment, the Core Plus investment offers income as well as growth potential. These types of investments are considered a low to moderate risk level, depending on the specifics of the property.
As can be expected, ownership in these properties will involve more direct participation to plan for the growth potential. A good example of this would a multifamily unit requiring some light renovations and updates to maximize occupancy.
The amount required for the updates and renovations will have an impact on the income from the property at the time these issues are addressed. Most of these properties will have returns of about 9% to 13% on an annual basis.
Value Add Investments
Value Add real estate has no Core income initially, but a lot of potential. It is helpful to think of these as investments that by adding value to the property will bring in additional income. This may include boosting occupancy, completing major upgrades or even changing property management practices.
While there is moderate to high risk in these Value Add investments, there is also a higher annual return possible. With the correct strategic planning and a lot of hands-on oversight initially, these properties can perceive an ROI of 18-20% annually.
Risk takers will enjoy the potential of an Opportunistic investment. These are high growth potential properties, but also extremely high-risk investments. This is a very hands-on investment consideration with extensive strategic planning, upgrades, development and even conversion of property as the major focus for potentially three or more years before any income is generated.
While the risk is high, so is the potential for reward for the right investor. It is not uncommon for these types of properties, when successful, to provide more than 20% returns on an annual basis.