What Are Core, Core Plus, Value-Add, and Opportunistic Real Estate Investments?
By Michelle Clardie on 08/03/2022.
Reviewed by Dan Gatsby.
In the 2020s, the language of real estate is expanding to include new ways to categorize real estate investing strategies based on risk and reward potential.
Real estate investments can be classified as:
Core
Core Plus
Value-Add
Opportunistic
As these terms are comparatively new, there is still some discrepancy over how the terms are being used. Real estate investors may disagree about the exact parameters of each of these investment categories, but we have all come to an industry consensus on the general spirit of each category.
In this article, we’re going to give you all the details on each of these investment asset classes. We’ll explain:
The main goal of each investment type,
The general risk and reward you can expect,
And the general timeframes.
We’ll also provide examples of core, core plus, value-add, and opportunistic investments to show how these classifications work in the real world.
By the end of the article, you’ll know which investment class best suits your current investing goals, and which classes you’ll want to pursue next as you build a diversified real estate portfolio.
What Is Core Real Estate Investing?
Core real estate investments are low-maintenance properties in great locations that attract high-quality renters with exceptional credit. While the exact rate of debt is debatable, core properties are typically funded by less than 50% debt. This low debt level allows the investor to retain substantial equity in the property, which minimizes risk.
Core real estate investments offer the lowest risk and greatest stability of the four asset categories. Core real estate investments are often the best place to start investing in real estate.
Existing, tenant-occupied residential rentals in good condition are a common example of core real estate investing (when purchased with a down payment of 50% or more). Investing in a rental property provides several benefits. Rental income from well-qualified renters creates reliable cash flow. And because the property is in a good location, investors also benefit from long-term appreciation. Even better, the gains are typically highly passive because the property requires very little work, and the renters require very little hand-holding.
Core property investing is also common in commercial real estate. Take a box store for example. Box stores are typically filled with credit tenants on exceptionally long-term leases. Credit tenants are tenants with such impressive credit history and resources that their rental payments are considered as safe as bonds to the property owners. And it’s perfectly common for these tenants to sign leases with terms of 10, 20, or 30 years, creating stable income for decades while requiring very little from the property owner.
So what is the downside to core investments?
The downside is that investors in core assets see lower returns than those who invest in riskier asset classes. Core investors generally have an expected return of 7-10% annually. This ROI is solid, but, as we’ll see in the next section, we can get better returns with core plus properties.
Characteristics of Core Investments
Risk Level: Low
Reward Level: Moderate
Timeframe: Long-term
Primary Goal: Stable cash flow with some growth
What Is Core Plus Real Estate Investing?
Core plus investing works exactly the same way as core investing, but with two key differences: Core plus comes with higher debt leverage and greater asset management responsibilities.
Remember, with core properties, we chose low debt leverage and low maintenance. But that limits our growth potential and returns. So with core plus, we want to take a little more risk by choosing older properties with greater maintenance needs or properties in slightly less desirable locations (particularly those with the potential to improve over the coming years).
And by leveraging more debt, we can increase both the risk and the reward potential of our core plus investment. Again, the industry has not agreed on exact parameters for debt leverage, but core plus properties are generally 50-60% financed. And investors generally like to see annual returns of 8-12%.
A concrete example of a core plus investment is a 20-year-old, tenant-occupied rental property purchased with 40% down. It’s in good condition but will need updating at some point in the near future. It’s located further from the city center in a decent neighborhood that is showing signs of growth.
Characteristics of Core Plus Investments
Risk Level: Low to moderate
Reward Level: Moderate
Timeframe: Long-term
Primary Goal: Strong cash flow and solid growth
What Is Value-Add Real Estate Investing?
Value-add real estate investing is when you purchase an existing property with distinct transformational potential.
Fix-and-flips are a prime example of value-add investing. You buy a property in physical distress and add value by:
Changing the layout,
Updating the fixtures and finishes, and/or
Adding an ADU (Accessory Dwelling Unit) to the property for additional living space.
When done correctly, the final product will be worth much more than the sum of its parts, and you’ll enjoy substantial returns over a short period of time. Value-add investors usually expect an annualized ROI of 10-15%.
The trade-off for this better-than-average ROI potential is increased risk. Not only are value-add projects more heavily financed (typically using debt leverage of 60-75%), but there is also more room for mistakes with value-add projects than with core and core plus investments. While core and core plus projects are designed to require comparatively little of the property owner, value-add projects require the owner to oversee a complex renovation project and then occupy the property with quality renters. This means you need to have the knowledge, experience, skill, and time to invest in your value-add project to make it a success. Poor planning and/or poor execution can sink your project, resulting in lower returns or even a loss.
This is why value-add investing is best for experienced investors. However, inexperienced investors can take advantage of the benefits of value-add investing through a process called real estate syndication. We’ll explain syndication in a bit, but for now, we just want you to know that there is a way for you to capitalize on value-add investments, even if you don’t have the personal experience to maximize your returns.
Characteristics of Value-Add Investments
Risk Level: Low to Moderate
Reward Level: Moderate to high
Timeframe: Short-term
Primary Goal: Solid growth and stable cash flow
What Is Opportunistic Real Estate Investing?
Opportunistic real estate investments are new developments that you build from the ground up (typically using debt financing of 50-70%).
Opportunistic investments come with greater risks and greater rewards than the other three investment strategies. Much of the risk comes from the fact that so much capital is required up front to fund the project. Even with heavy financing, you may need to invest several hundred thousand dollars in prepping a vacant lot, designing the structure, building the structure, and marketing your new development to prospective renters. And it could be years before you see any returns from your investment.
Take a new multi-family development as an example of opportunistic investing. You would need the expertise to scout the ideal location and design a building that would appeal to today’s renters. You would need insider knowledge and industry connections to navigate the building process, including understanding zoning and obtaining the necessary permits. You would need a talented architect, trustworthy project manager, and reliable builders. And you would need to invest your own time in overseeing the development through the construction phase and into the lease-up phase.
In exchange for your specialized knowledge, skill, time, and risk tolerance, opportunistic investors expect the highest annual return on their investment. And when done properly, it’s common to see annual returns of over 20%.
Traditionally, opportunistic real estate investing was left to professional real estate developers and private partnerships. But through real estate syndication, everyday investors can leverage established real estate developers to get in on the action while minimizing risk. So in our next section, we’ll give you an overview of how syndication works. And we’ll show you how syndication makes these high-reward deals available to everyday investors.
Characteristics of Opportunistic Investments
Risk Level: Moderate
Reward Level: High
Timeframe: Mid-term to long-term
Primary Goal: Strong growth plus solid cash flows
Diversify Your Core, Core Plus, Value Add, and Opportunistic Real Estate Investing with Gatsby Investment
We briefly touched on using real estate syndication to access more sophisticated investments like value-add and opportunistic investment properties. And now we’re going to show you how it works!
With real estate syndication, individual investors can jointly fund a real estate project, which is professionally managed by a syndicate sponsor. You get expert management over your investment, which minimizes risks, and your returns are purely passive!
Even better, with Gatsby Investment (an LA-based syndication firm) you can take advantage of multiple strategies by investing in a single property… Introducing our Build-to-Rent Investment Concept!
Our Build-to-Rent concept starts with a new development project. You can get in on the ground floor of an opportunistic investment like a multi-family development, which allows you to capitalize on the exceptional returns. When the new construction phase is complete, you can continue your investment into the core (or core plus) rental phase, which allows you to benefit from the ongoing cash flow, tax benefits, and appreciation!
Similarly, you could choose a single-family value-add renovation to take advantage of quick growth, then continue your investment into the core rental phase for the long-term benefits of property ownership.
Don’t want to lock yourself into a long-term investment? No problem! You’ll have the option to cash out after the value-add or opportunistic development phase of the project! With our low investment minimums, you can spread your capital across multiple projects for an instantly diversified real estate portfolio. And with our flexible investor options, you can invest as an individual, as a company, or even through your retirement accounts.
Here’s the best part: you can invest from anywhere in the world, and let our local real estate experts take care of the work for you. You don’t have to have personal relationships with developers or manage a major construction project. You don’t even have to work with renters or worry about property maintenance. Gatsby will professionally handle all of that for you!
