What Is Core Plus Real Estate Investing?

Real estate has long been an attractive asset for investors, offering avenues for generating income, preserving wealth, and achieving capital growth. The market presents a range of opportunities to align with individual financial goals.

Understanding Core Plus Real Estate

Core Plus real estate is an investment strategy balancing stable income generation with moderate value-add potential. These properties are often well-occupied and located in good areas, similar to “Core” assets, but offer opportunities for enhancement.

Properties may be 10 to 20 years old, in good condition, but might require deferred maintenance or minor upgrades. Examples include Class B multifamily properties or older office buildings. The “plus” signifies the ability to improve cash flows through light enhancements, management efficiencies, or attracting higher-quality tenants. This approach blends stability from existing cash flow with growth from targeted improvements.

While Core Plus properties share traits with Core assets, their cash flow can be less predictable due to active management and potential minor renovations. These investments often involve properties with high-quality tenants but also expiring leases, adding risk and an avenue for value creation.

Core Plus vs. Other Real Estate Strategies

Real estate investment strategies are generally categorized into Core, Core Plus, Value-Add, and Opportunistic, each reflecting different risk and return profiles.

Core Investments

Core investments, the most conservative, focus on high-quality, fully leased properties in prime locations with stable, predictable cash flows and minimal management. These assets typically have long-term leases with creditworthy tenants and require little to no capital improvements, aiming for capital preservation and steady income. Core properties often use lower leverage, typically 40% to 45% debt, and target annual returns between 4% and 10%.

Core Plus Investments

Core Plus investments, with low to moderate risk, offer higher return potential than Core properties. They involve stable assets that may be slightly older, in less prime locations, or require minor improvements and more active management. These strategies might involve properties with expiring leases or deferred maintenance, providing opportunities to increase cash flows through light renovations or management adjustments. Leverage typically ranges from 45% to 60%, with annual returns from 8% to 12%.

Value-Add Strategies

Value-Add strategies involve moderate to high risk, focusing on properties that require significant improvements to increase their value and cash flow. These properties often have issues like low occupancy, deferred maintenance, or management problems, and require substantial capital investment for renovations, rebranding, or operational changes. Value-Add investments are more hands-on and aim for appreciation through repositioning, with expected annual returns between 11% and 15% and leverage often between 60% and 75%.

Opportunistic Investments

Opportunistic investments represent the highest risk and highest potential return strategy, often involving distressed properties, ground-up development, or major repositioning. These assets may have little to no cash flow at acquisition and require extensive capital and active management to create value. Opportunistic investors typically use 70% or more leverage and target annual returns exceeding 20%, compensating for the significant uncertainty and longer investment horizons.

Investment Profile of Core Plus

Core Plus real estate offers a compelling investment profile for those seeking a moderate risk level. This strategy provides stability through existing cash flows from well-occupied properties, combined with opportunities for growth by implementing modest improvements.

The expected annual returns for Core Plus investments typically range from 8% to 12%, with a portion from stable income and the remainder from property appreciation. This blend of income and growth makes it attractive for investors who prioritize predictable cash flow but also desire some upside potential. Core Plus properties may involve slightly higher leverage compared to Core assets, usually between 50% and 65%, which can enhance returns but also introduces more risk.

These investments typically have a medium-term investment horizon, aiming to capitalize on value creation opportunities over a shorter period than pure Core investments.