What is Core, Core Plus, and Value-Add Real Estate?

An investor might want to think about it this way: When considering what types of investment to add to a portfolio, different investors will have different tolerance levels for risk. While some might be willing to take additional risks in order to possibly garner a higher net return (value-add), others prefer a real estate risk profile on the lower end of the scale (core) and others might want something in between (core plus).

It should be noted that core, core plus and value-add profiles are frameworks that can be used to understand the complex interplay of risk and reward in investment opportunities. Very rarely will a specific real estate property perfectly fit one definition or another. As such, we will speak of these concepts in broad, general terms to help clarify and distinguish the essential features of each risk-reward profile to help investors better understand the investment landscape.

The market uses “core” to refer to those real estate assets that tend to fall on the lower end of the risk profile for real estate investments – these properties have typically been built within the past five years, and may not need any upgrades or repairs at all when they are acquired, thus requiring minimal work on the front end. Core assets typically exist in highly desirable locales, often in urban areas, and attract higher-income tenants who are willing to pay top-of-market rents. A common example is a new high-rise apartment property in a downtown area.

Most of the return from core properties is income – that is, cash flow from rent payments – thus these properties tend to generate a relatively low, if stable, return when compared with other risk reward profiles. This stems from the fact that core properties tend to be fully leased with a lower turnover tenant base. In other words, there is a lower risk of vacancy at these properties. Historically, these properties present more consistent income returns, making core properties particularly attractive to institutional investors, like pension funds which seek steady returns to meet their long-term liabilities.

“Core plus” properties are higher on the spectrum of real estate investment risk than core properties. There are many factors in play – a core plus asset might, for example, exist in a desirable neighborhood and house a stable and credited tenant base, but the property was built a decade or so ago. With that in mind, the purchaser could decide to invest in a handful of design upgrades that make the property a little more enticing to renters, such as repainting the exterior, installing new in-unit appliances, and updating the clubhouse, courtyards and other common areas and amenities.

On top of the income generated from rent payments, the aim is that the cost taken on when improving the asset could result in a higher appreciation return (or increase in property value) once the property is sold. Thus core plus assets introduce both higher risk and a higher potential return than core assets. For example, market conditions could change, the business plan could go awry, or potential tenants could simply be unmoved by the rebranding or repositioning of the asset. On the other hand, if all goes well with the asset upgrade, a property could return to its full value potential, increasing the property’s income and overall price on the market.

A rung higher on the risk/return ladder is where “value-add” properties live. “Value-add” implies that the buyer is willing to take on more risk, and possibly significant expenditure of time and capital, because they see the potential for a high return if things go their way. An example of a value-add property would be a 30-year-old apartment building with a lower income tenant base. The owner of this property might decide to make changes as extensive as building a larger pool on the property, upgrading an outdated plumbing system, or other maintenance and capital expenditures.

A value-add project often requires moderate to extensive upgrades and repairs. The process necessitates a lot of oversight and calculation as to how much capital to spend and what to spend it on in order to achieve targeted returns. If all goes according to plan, the property owner could increase the rent with the intention that the asset begins generating more income (cash flow).

Value-add projects are riskier than the other two asset return profiles described here because there are more variables to consider – a property owner might sink time and capital into the project that they believe will reap strong returns, but if the market conditions change, a natural disaster strikes or any number of things goes awry, the returns might not be as rich as initially projected – or in certain circumstances, may not materialize at all.

We encourage anyone considering investing in real estate to do their due diligence when looking for the right assets for their portfolio. Investors will also want to take the time to reflect on their appetite for risk, given their own situation, their financial goals and the wider market environment.

All real estate assets are subject to a variety of environmental and market factors that could affect potential returns. Risks also vary by geographic region and commercial real estate type, though this article focuses on multifamily real estate in particular. Core, core plus and value-add strategies are some of the most common approaches to real estate investing. Not every potential real estate investment opportunity will easily fit within each risk-return profile outlined above. However, we hope that our explanations will provide a theoretical framework by which investors can assess whether or not a particular opportunity fits within their investment goals and risk tolerance.