Core, Core Plus and Value-Add: Breaking down real estate investment strategies
Commercial real estate equity investments can be classified into three strategies:
- Core — Generally lowest risk and target returns
- Core Plus — Generally low-to-moderate risk and target returns
- Value-Add — Generally moderate-to-higher risk and target returns
The properties backing these investments differ on the basis of property location, property conditions, management effectiveness and quality of tenants.
Here is what investors need to know about each strategy.
Core
Core real estate investments are high-quality, low-risk assets that offer the most stable and consistent cash flow. These properties are typically fully leased buildings in high-quality locations and require very minimal, if any, upgrades. The property’s tenancy is also very stable, with residents generally choosing to renew leases consistently. Property owners often don’t have to worry about large scale renovations, which keeps the capital expenditure budget to extract value from the investment relatively low.
Core real estate investments often get compared to bond investments because they’re able to generate stable cash flow with very little asset management. Moreover, the majority of the expected return is generated through cash flow from the property rather than price appreciation. Given the lower risk profile however, core properties tend to generate lower returns than Core Plus and Value-Add opportunistic strategies, which are discussed below.
Core Plus
Core Plus properties aren’t as stabilized as core real estate, but they’re also not in need of a total overhaul. They generally have a greater amount of untapped potential in comparison to Core properties. For example, owners can often increase cash flow through light renovations, improving management efficiencies and managing quality of tenants. The business plan to extract maximum value from these types of properties is more extensive than Core properties but can also result in higher appreciation of the asset over time. Given the additional effort and risk involved with getting these properties to their optimal form, investors can often expect higher potential returns from Core Plus properties than from Core investments.
Value-Add
The third type of real estate investment strategy is with Value-Add opportunistic properties, which generally provide the greatest returns but at the expense of additional risk associated with the cost of improvements. These are often buildings in need of more renovations but upon completion of these improvements, these properties are expected to be leased at higher rents and their valuations are likely to increase, which will be passed onto investors at the time of sale. While Value-Add properties carry more risk, Yieldstreet applies conservative underwriting assumptions to assess the quality of each offering and only seeks to acquire Value-Add properties in areas that have strong economic and employment fundamentals, and are supportive of property valuation increases.
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2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]