Introduction: Core and Core Plus Real Estate
Individual investors continue to seek greater portfolio diversification and explore opportunities in private real estate and other alternative asset classes. It is crucial to understand different real estate investment strategies and how to fit them to your portfolio. In this comprehensive guide, we will delve into the world of core real estate and core plus real estate: the definitions, benefits, distinctions, and how you can access these investment opportunities in 2024 and beyond.
Whether you’re a seasoned investor or just starting, this article will equip you with the requisite knowledge as you evaluate core and core plus real estate investment opportunities.
What is Core Real Estate?
Core real estate refers to investment properties that are considered stable and low-risk. These properties are typically located in prime locations, such as central business districts or well-established residential areas. Core properties are known for their stable cash flows, high occupancy rates, and long-term lease agreements with creditworthy tenants. They are often characterized by their high-quality construction, strong asset management, and reliable income generation.
Core Real Estate Definition
Investment properties that are considered stable and (relatively) low-risk. Hence, among the typical commercial real estate investing strategies, core real estate projects to the lowest risk (variance in outcomes) and lowest potential total return.
Investing in core real estate offers numerous potential benefits. Firstly, it provides investors with a steady stream of passive income, making it an attractive long-term investment option. Additionally, core real estate investments are less susceptible to market fluctuations, providing a certain level of stability even during economic downturns. The high likelihood of steady (albeit modest) capital appreciation over time is another advantage, as prime locations tend to retain value.
On the flip side, core real estate is generally associated with low cap rates: the ratio of rental income to fair-market value of the asset is relatively low at any given time versus older properties or those in less established markets. Put differently, the stability of the asset is priced in, limiting the upside potential of a core real estate investment.
An example of a core or core-plus location: Greenpoint, Brooklyn
What is Core Plus Real Estate?
Core plus real estate, on the other hand, involves properties that have similar characteristics to core properties but may require additional strategic improvements or proactive management to enhance their value. These properties often offer a slightly higher risk profile compared to core properties, but also present the potential for higher returns.
Investing in core plus real estate can be an opportunity for investors seeking a balance between stable income and growth. These properties may have higher vacancy rates or shorter lease terms compared to core properties, but they also offer the potential for increased cash flow and appreciation through active management and light capital improvements. Core plus investments are ideal for investors looking for some degree of total return potential while maintaining stability and strong cash flows from rent.
Core Real Estate Definition
Investment properties that are considered stable and (relatively) low-risk, but with some degree of growth in value, typically from anticipated growth in rents. Hence, among the typical commercial real estate investing strategies, core real estate projects to the second lowest risk (variance in outcomes) and second lowest potential total return.
Core vs. Core Plus Real Estate: Key Differences
When comparing core and core plus real estate, it’s important to understand the key differences between the two investment strategies.
- Risk and Return Profile: Core real estate investments typically offer lower risks and more stable returns due to their prime locations, high-quality tenants, and long-term lease agreements. Core plus real estate, on the other hand, carries slightly higher risks but also provides the potential for higher returns through active management, lease-up strategy, or light capital improvements.
- Property Characteristics: Core properties are often fully stabilized and require minimal improvements. They are already generating consistent income and tend to attract risk-averse investors seeking steady cash flows. Core plus properties may have some operational or physical issues that need to be addressed to maximize their potential. They present an opportunity for investors to add value through modest renovations, repositioning, or lease-up initiatives.
- Investment Horizon: Core investments are typically long-term, with investors aiming to generate consistent income over an extended period. Core plus investments may have a medium-term investment horizon, where investors seek to capitalize on value creation opportunities over a shorter period. These investments often involve a repositioning or stabilization phase before transitioning to a more stable income-generating phase.
While core plus real estate investments may be higher risk and higher potential upside than core real estate investments, core plus real estate is a more risk-averse, less operationally complex, lower upside strategy than value-add or opportunistic real estate investing strategies.
There is no exact cutoff between “core” and “core plus.” Properties should generally be highly occupied and stabilized to fit as core/core+. Some real estate investors think of core as major properties only (office, multifamily, retail, or industrial) in primary markets, but I personally feel that you can have core/core+ properties in strong secondary markets as well (e.g. trophy assets in smaller cities).
Charles de Andrade, CAIA
Director of Capital Markets at EquityMultiple
Generally speaking, both core and core plus real estate investments feature lower leverage (under 50%) though this may not be true in all cases.
A Q&A with the sponsor from a core-plus multifamily offering previously available on the EquityMultiple platform
How to Access Core and Core Plus Real Estate Investments in 2024 (and beyond)
Accessing core and core plus real estate investments has become easier for individual investors, thanks to fintech platforms. These platforms act as intermediaries, connecting investors with real estate opportunities that were traditionally only accessible to institutional investors. Here’s how you can access core and core plus real estate investments in 2024 (and beyond):
- Research Platforms: Begin by researching reputable real estate investing platforms that offer core and core plus investment opportunities. Look for platforms that have a track record of successful projects, a diverse range of offerings, and transparent investment structures.
- Evaluate Investment Offerings: Once you’ve identified potential platforms, carefully review the investment offerings available. Pay close attention to the location, property type, investment strategy, and the historical performance of similar projects. Consider diversifying your portfolio by investing in a mix of core and core plus opportunities based on your risk tolerance and investment goals.
- Perform Due Diligence: Perform thorough due diligence on the platform, the project sponsors, and the specific investment opportunity. Review the project’s financial projections, property appraisals, and any legal documentation. It’s essential to understand the risks associated with each investment and ensure they align with your investment objectives. You may want to consider investing with a platform like EquityMultiple, which performs in-house due diligence on top of the due diligence performed by the sponsor.
- Monitor and Manage Investments: Once you’ve made your investments, actively monitor their progress through regular updates provided by the sponsor and/or platform. Stay informed about any major developments, such as lease renewals, renovations, or market fluctuations. Consider diversifying your investments across different projects, locations, and investment strategies to minimize risk.
In the years to come, following a period of rapidly rising interest rates, many investors are seeking greater stability. Dislocation in capital markets potentially creates opportunity across strategies and markets. Core and core plus equity real estate investments often pencil to projected IRRs in the high teens or low twenties, respectively. At a time when private real estate debt may offer “equity-like returns,” allocating to core and core plus real estate may seem less appealing given the narrowing spread between yield on debt investments and annualized return of these relatively safe equity investments. However, keep in mind that core and core plus real estate still benefit from potential appreciation. While inflation still threatens to hurt real returns of fixed-income investments, it may be worth diversifying to core and/or core plus real estate equity investments even if you are taking a more defensive posture toward your real estate portfolio.
Conclusion: How Self-Directed Investors Should Approach Core and Core-Plus Real Estate
As an individual investor, gaining exposure to core and core plus real estate investments can provide you with stable income, potential capital appreciation, and diversification benefits. Core properties offer stability and reliable cash flows, while core plus properties present opportunities for increased returns through active management.
By leveraging a modern real estate investing platform, you can access these investment opportunities at a substantially lower barrier to entry, and take advantage of the benefits that professional investors have long enjoyed. Remember to conduct thorough research, perform due diligence, ask lots of questions, and diversify your real estate portfolio across core, core plus, and other strategies in order to balance risk and pursue a blend of current cash flow and long-term upside potential.
