What are core, value-add, and opportunistic investments?

Not all real estate investment opportunities are equal. Because the risk and potential returns of each investment can vary greatly from the next, deals are typically categorized into one of three categories: core, value-add, and opportunistic.

These categories help to both classify each deal for potential investors and to delineate what some of the goals might be for increasing returns or sale price. Let’s take a closer look at each category and what it tells interested investors about how a real estate deal will perform and be handled over time.

Core Investments

Core investments are the least risky category of real estate deals. These properties are well-established, high-quality assets typically located near an urban center. Think of glamorous luxury apartments or downtown high-rises--these types of properties typically don’t have vacancy problems and are well-maintained, inside and out.

Core investments have lower returns but also come with lower risk than investments in other categories. They have a predictable income and don’t need any costly or structural repairs to generate increased returns. A core investment has less potential for significant appreciation because it doesn’t come with an upfront need for improvement, but ideally provides consistent, low-risk returns over time.

Core-plus Investments

There’s a subset under this category commonly called core-plus, which refers to deals that are slightly higher in both risk and returns. This might include properties that meet all of the “core” requirements but have a less ideal location or a slightly higher vacancy rate. Because of the higher risk, many of these deals come with a higher return rate.

Value-Add Investments

The next category is the Value-Add Investment, which is higher in both risk and reward. This includes assets that need physical improvements which, when accomplished, will add value through more efficient operations, increased rents, and/or renovations that boost curb appeal.

Value-Add Investments are typically in a good location but run the risk of execution of the proposed changes: returns hinge on successful improvements that in turn are able to bring in higher rents and/or lower vacancy rates. If these improvements are successful, investors will receive higher returns.

Opportunistic Investments

Investments that come with the highest level or risk are called opportunistic, or distressed, investments. Like value-add assets, they require rehabilitation in order to add value, but are considered more risky and time-consuming. These investments include properties with high vacancy (30-100%) or undeveloped land.

Opportunistic investments are the most risky because they typically won’t cash flow until the proposed changes are made. Additionally, there’s no guarantee that rehabilitation or improvements will be as successful as planned. Opportunistic investments usually offer higher rates of return to investors but can ultimately fall short of projections.

It’s also important to be aware of opportunistic deals marketed as value-add deals. It’s easy to mischaracterize the risks by glossing over the details of rehabilitation and over-emphasizing the credibility of projected returns. Research each deal carefully to form your own opinion of what risk it will incur.

Choosing Between Core, Value-Add, and Opportunistic Investments

Every investment falls on a spectrum from lower to higher levels of both risk and return. It’s helpful to be aware of your own tolerance for risk and which type of investment will work best for you before pursuing the first deal that comes your way. If you’re looking for the opportunity to make higher returns and have the flexibility to withstand substantial risk, considering a value-add or opportunistic investment as part of your portfolio might prove beneficial. If you’re looking for stable financial growth over time, a core investment is more likely to serve you best.