Opportunistic vs. Value Add vs. Core Property Investments
What’s your real estate investment strategy?
Core, value add and opportunistic are all terms that refer to real estate investing strategies. It’s smart to know how they differ and the role they can play in your portfolio, to make sure you are investing with the right team.
How do they differ? What are their pros and cons?
Core Property Investments
Core investments are your vanilla, ‘safe’ bets with anticipation of lower risk and lower returns. They are typically bought for wealth preservation and cash flow.
Like property classes, this is an A type or blue-chip investment. Little expectation of growth through the creation of additional value, but with hope that they will hold their value and increase it long term while continuing to be attractive to premium tenants.
An example of these investments would be luxury apartments, prime office buildings and retail in places like Manhattan, with national credit tenants.
Core Plus investments expand this slightly further. Still strong properties in desirable locations, but may include newer apartment buildings with high occupancy rates in secondary markets and a proven track record of performance. Or Class B properties which can be updated around primary gateway cities.
Value Add Property Investments
Value add investors are looking for more growth, higher returns, and the ability to influence their own asset values and performance.
These investments tend to be of moderate risk, with some cash flow on acquisition, but the potential to become worth much more with additional investment and better management.
This is more of your Class B/C property types, which can benefit from superior property management to elevate occupancy rates and new market rate tenants. Or buildings which can be worth far more with some interior renovations, exterior updates and/or property expansions.
Opportunistic Property Investments
Opportunistic investments are where investors will find the best yields and most capital growth, albeit with the highest risk.
This will typically involve development projects or tackling non-performing properties, and then making significant improvements, updates, repositioning and leasing.
These are often outdated or distressed properties. They may be currently deemed as Class C or D properties, even if they are in Class B locations. However, their low acquisition costs can unlock the highest returns, with forced equity growth from calculated and experienced managers renovating and renting them.
Summary
Some investment firms only focus on one of these strategies. All can have some place in your portfolio. That allocation may depend on current resources, financial goals and timelines, as well as marketing timing. Core and Core Plus may perform more like bonds, whereas Value Add is more like a strategic business buyout by private equity or larger corporation. Opportunistic is similar to what experienced VCs do with promising startups. All of course with the added security of physical real estate collateral and rent revenues. You may want the passive income of Core and the quick growth of Opportunistic in your portfolio. There’s room for both.
