Be greedy when others are afraid and fearful when others feel greed
When you peruse the commercial real estate opportunities hosted on a plataform of real estate crowdfundifng, you’ll notice that the offers all fall into one of four categories: Core, Core-Plus, Value Add, and Opportunistic.
These four categories are strategies used by real estate operators to achieve returns from properties, but they’re also signals to investors about what to look for in terms of risk and return from a given opportunity.
In other words, knowing what these strategies are, how they are classified, and what characterizes them will help you find the deals that fit your needs best. This brief rundown of the four commercial real estate strategies will help you to understand opportunities you’ll find on RealCrowd’s platform.
Core: Lower Risk/Lower Returns. The most conservative and lowest risk of the four classifications, core property investments utilize lower leverage and tend to generate predictable cash flows. The properties are often positioned in strong markets, like thriving metropolitan areas, and are easily financed.
There is a lower probability of sustaining loss of investment on core properties, but this also means the potential for outsized returns is also on the lower end of the spectrum. As such, this category of real estate investment is the wheelhouse of conservative income seekers.
Core-Plus: Moderate Risk/Moderate Return. A core-plus investments has some similar attributes as a Core investment. Like Core investment, Core-Plus properties generally have few to no issues with securing financing, are well located and typically have a strong tenant base. The difference is found in a limited elevation of risk and potential for increased NOI, like upcoming lease rollover or light value-add opportunity. Core-Plus will appeal to much the same investor as Core opportunities — mostly conservative, with lower risk tolerance.
Value Add: Medium-to-High Risk/Medium-to-High Return. This class of investment is characterized by the opportunity to improve the investment in some way. In other words, to add value to it. This improvement often comes in the form of enhancing the physical property itself or increasing the operational efficiency. The increased risk of Value Add opportunities stems from the expectation that this improvement will generate higher cash flows and returns.
Opportunistic/Development: Higher Risk/Higher Return. These properties require the most enhancement in order to generate the expected level of returns. What this entails depends on the specific property, but can range from ground-up development to redeployment of existing structures. The potential for outsized returns here is very high, but accordingly the risk is highest as well.
These four categories are best thought of as existing on a spectrum of risk and return. One Value Add opportunity will differ in its profile from another. The details matter. Also, knowing your own risk tolerance and portfolio needs will go a long way in helping you navigate these categories.