WHAT ARE CORE PLUS INVESTMENTS?
Core plus real estate, is similar to core, but not quite as high quality. The property might be in the suburbs, or a secondary metropolitan area. The tenant may
not be creditworthy or may not have a rent guarantee from high quality national company. The investment might involve a property type that is riskier than one of the big four, such as self storage, entertainment, medical offices, or student housing. These types of investments are low to moderate risk, and return slightly more than core.
The timing is similar to core, except you should taper off a little earlier at the end of the cycle/super cycle, since it will experience losses before core does.
Historic rates of return: 8 to 12%
Leverage: 40-50%
Risk: low to moderate
WHAT ARE THE CHALLENGES?
Value-add properties may be outdated or rundown and require physical improvements due to neglect or owners lacking the capital to make improvements. Value-add properties may also have operational issues due to poor management and typically have a higher vacancy rate – around 50 to 80 percent leased – than other assets of a similar size in their neighborhood.
These properties have the potential to achieve higher returns after increasing income with the right kind of physical upgrades, better management, added services or more effective marketing. They can also be more lucrative after reducing and optimizing expenses. These operational and capital improvements add value beyond routine physical upgrades, and can attract new tenants, improve retention of existing tenants and generate higher rents from both segments. When the right value add property is purchased in the right market, higher returns are realistic with a manageable level of risk.
