Core investments, core plus investments, value-add investments, and opportunistic investments are the four types of most commonly used investment approaches syndication companies use to find properties that are in line with their goals and overall strategy.
Value-Add and Opportunistic investments are investments that are made for the purpose of gaining a financial advantage. For instance, at Thousand Doors Group, we referred to our investing strategy as "value-add" and "opportunistic." We are going to dive into the specifics of what all four of these investment strategies entail.
As A Passive Investor, Why is it Important For You to Know The Difference Between Different Investment Strategies?
You will not have a clear sense of the potential risk and return targets for each investment you make unless you are familiar with the four techniques that are listed above. If one of our investors wants to ensure that they receive the highest possible return on the money that they've invested through our syndication projects — or if they want to steer clear of investments that carry a high level of risk — we’d need to be aware of which alternative is the one that works best with their investing goals. Understanding the distinctions between these four investment approaches is vital if you are considering entering the real estate investment market.
Core Real Estate Investments
The most reliable and trustworthy of the four different investment strategies is the Core. It is also the approach with the lowest predicted return, which is anywhere between six and ten percent, or even lower.
Core investments often involve acquiring income-generating, Class A real estate in large cities, finding tenants with strong credit scores who are willing to sign long-term leases, and then selling the property after holding onto it for a few years. The purpose of this endeavor is, of course, to make a profit from the appreciation of the property or the strategic timing of its purchase and sale on the market, with the income from tenants serving as a means to either break even or generate positive cash flow. Equity groups that are primarily concerned with core investments do not have the intention of fixing up and selling a property. They want to maintain it in a manner that is relatively unchanged while simultaneously collecting rent from renters in order to ensure a stable cash stream. This tactic resembles bonds the most out of the four options available to you. Companies have a propensity to emphasize how dependable and secure this method is.
It is a suitable alternative for elderly investors who are searching for a guaranteed income in retirement; however, younger investors and investors who are interested in investments with a larger risk and a higher potential return should explore elsewhere. This strategy's primary focus is on reducing risk rather than increasing return on investment.
In general, core real estate is concerned with the following:
Class A property
6-10% expected returns
Densely populated areas
Stable, mature properties that have a history of producing income
Reliable tenants with high credit scores
Using as little leverage as possible (25-35% or less)
The goal? Hold, collect income from leasing, sell in the future
Core Plus Real Estate Investments
What's the difference between core real estate and core real estate plus property?
As its name suggests, core plus possesses a significant number of the same characteristics as core real estate. Both emphasize real estate that is established, mature, and occupied by dependable tenants. Core plus, on the other hand, concentrates on real estate that is of a slightly lower quality (or that is not located quite as centrally) than core. They both want to keep possession of the property for some time and then sell it at some point in the future; however, core plus will make some minor enhancements to the property in the interim. Those enhancements may involve improved furnishing and some small changes to older systems, but they rarely (if ever) include considerable restructuring of the system.
There is a possibility that there are some further minuscule distinctions.
Some Class A but mostly Class B property
8-12% expected returns
Densely populated areas and suburban areas
Stable, mature properties that produce income
Reliable tenants (but perhaps not as reliable as core)
Have a looser relationship with leverage (30-60%+)
The goal? Hold, collect income from leasing, fix up slightly, sell
Value-Add Real Estate Investments
In addition to core and core plus, there is a third combination that moves farther up the risk-and-reward ladder called value-add. Value-add necessitates a larger initial commitment of capital to perform property upgrades, in contrast to core plus, which includes some form of property enhancement. This strategy places less of an emphasis on income-generating buildings and places a greater emphasis on appreciation through the renovation and redesign of Class B and Class C properties. (However, it is important to keep in mind that the majority of returns from many core and core plus investments are also generated through appreciation upon sale; all that is required is to wait for the market to expand. The primary distinction is in the amount of time involved.) When using value-add strategies, appreciation is often realized a great deal earlier).
Adding value can be accomplished through investments such as purchasing properties in expanding markets at a discount. This opens the door to the prospect of renewal. To put it in the simplest terms possible, the property's "value" is "added" when physical upgrades, as well as operational changes in the management structure, are made. For example, here at Thousand Doors Group, we tend to upgrade both the exterior and the interior of the apartment complexes we acquire, which allows us to capture value at every step of the value chain. Our dedication to optimizing the overall operation of the apartment complexes we acquire means that we watch very closely on the property’s expenses, the timeline of the project, as well as the quality and efficiency of our operations.
Class B & C property
15-20%+ expected returns
Up and Coming areas that are within 2 hrs proximity of major cities
Buildings might be slightly run-down or in need of repair
Might be lower occupancy
Requires a lot of capital to wait out periods of low occupancy and construction
High upside
The goal? Find high-potential buildings in burgeoning markets, fix them up, secure tenants, and sell.
Opportunistic Real Estate Investments
The concept of value-add is quite similar to that of opportunity real estate. The relationship that opportunistic property has to value-add is comparable to the one that core plus has to core in that it is more aggressive, has a larger risk, and has the opportunity for a bigger return. At Thousand Doors Group, we also place a strong emphasis on opportunistic properties in the hope of achieving the highest possible returns on certain of our holdings.
The bullet points are almost identical to the ones that were mentioned above, with the exception that larger predicted returns are included:
Class C property
18-25%+ expected returns
All types of areas
Buildings in need of repair
Low occupancy or vacant
Emphasis on redesign, renewal, and revitalization
High upside
The goal? Find distressed buildings in burgeoning markets, fix them up, secure tenants, and sell.
Is the Value-Add Strategy More Dangerous Than the Others?
Indeed, but the potential for profit that comes along with that level of risk is significantly higher.
Core and core plus real estate investments are almost always intended to have a lower level of risk than the value-add and opportunistic investments that are prioritized by some companies. The majority of the time, they do in fact have a lower risk, but we would like to make it clear that pursuing stability does not ensure profits.
For instance, JP Morgan recently published the results of an investigation into the corporations included in the Russell 3000 index, which is a compilation of the 3000 largest publicly-held companies in the United States. The investigation revealed that "roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value." What exactly does that mean? Even among huge, supposedly "secure" businesses operating in well-established marketplaces, roughly half of them at any given time are probably going through a fall from which they will never fully recover.
When you invest in a variety of real estate holdings, the risk that you face is typically inextricably related to the markets themselves, and not just the method that the company takes. This is true even if every investment includes some level of risk. Because of this, Thousand Doors Group is primarily focused on expanding markets in the Sunbelt States. Our primary goal is to achieve the highest potential rate of return to our investors by always underwriting the deals conservatively and providing a clear expectation and business plan to our investor when we present an investment opportunity.
Recap
As a quick review, the following are some of the qualities that are connected with each strategy:
Core
Class A property
6-10% returns
Lower leverage
Buy stable, income-producing property, collect income, barely touch property, sell for gain
Core Plus
Class A and B property
8-12% returns
Looser relationship with leverage
Buy lower-quality properties, make small improvements, improve tenancy rate, collect income, sell for gain
Value-Add
Class B & C property
15-20%+ returns
Requires more capital to wait out low tenancy periods and construction
Buy distressed and discounted properties, fix and redesign, sell for gain
Opportunistic
Class C Property
18-25% returns
Similar to value-add, except more aggressive and higher-risk
Conclusion
These definitions may provide you with a general notion of the kind of real estate that a syndication company is interested in purchasing, but there is no assurance that this will always be the case. Examine not only what the organization says it does but also the activities it actually engages in. When researching a potential investment, you should always perform adequate research.
WE'RE HONORED TO BE IN BUSINESS WITH YOU
Building wealth doesn’t always require you to do all the work you normally would as an independent real estate owner/investor. You can also accomplish the same goal by taking advantage of a syndicated real estate project.
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