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  • Steven Fletcher

Refining Your Menu

Recently had a phone call with a close friend and was discussing the current real estate market.

Started to mention the type of deals that we can take on and was quickly asked to explain what each one meant.

He can't be the only one.

So, here's a breakdown of the different terms.

These define the risk and reward characteristics of a real estate investment- ordered from lowest to highest risk.

1.)    Core: Core properties are typically stable (occupied, generating income) low-risk investments that require minimal renovations. Investors looking for long-term, low-volatility assets often opt for core properties.

You’re likely paying a premium for the asset as much of the work has been done for you- some are just fine with that so long as stabilized yields justify the check.

2.)    Core Plus: Core plus deals are usually occupied and generating income like core properties, but provide opportunities to add value through cosmetic improvements.

Think paint, countertops, vanities, lighting, fixtures, tile, landscaping, etc. (though necessary repairs will likely be needed as well).

You aim to increase the property's efficiency, aesthetic, tenant satisfaction, or curb appeal, without changing major structural components.

In turn, you hope to achieve higher rents for the work rendered.

Lower risk and often lower returns when compared to more invasive strategies detailed below.

3.)    Value-Add: Value-add properties require significant renovations or improvements aimed at returning the asset back into commerce and maximizing value/income potential.

These assets often have little to no income at the time of acquisition and years of deferred maintenance.

Think of that house with the caved in roof that you occasionally pass on the highway- that would qualify as value-add.

These projects are where you can implement your vision for a property.

Gut interiors, re-work floor plans, replace/upgrade MEP, new windows, replace exterior facades, etc.

Larger risk profile than core and core plus, but potential for higher returns given the larger scope of work.

4.)    Opportunistic: Opportunistic investments are high-risk, high-reward ventures that involve ground-up construction or the repositioning of an asset (think office to multifamily conversions).

What makes them so risky?

You’re creating something out of nothing.

Meaning, you’ll need to tie up the site, perhaps re-zone or combine parcels, ensure you can build on it (phase I, soil tests), solicit input from neighboring properties (one angry neighbor can add 6 months to your projected timeline), and go through an extensive entitlement process before a shovel hits the ground.

Many have done extremely well in this space but it’s the riskiest approach and one with the most downside risk (budgeting is crucial).

Each type carries its own set of risks, rewards, and considerations.

Just a matter of matching skill sets and risk appetite to what’s needed in the respective project.

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