Navigating Real Estate Investments: Understanding Core, Core Plus, Value-Add and Opportunistic Strategies

In the dynamic landscape of real estate investment, strategic decisions hinge upon an intricate balance between risk and return. Four distinct categories—Core, Core Plus, Value-Add and Opportunistic—emerge as key examples, each offering unique opportunities and challenges. Let’s look at the nuances of these strategies to equip you with a comprehensive understanding of each characteristic and how they may relate to your DST investment(s).

 

Core Real Estate Investments

At the bedrock of real estate investment lies the Core strategy, embodying stability and reliability similar to income investments in the stock market. Core properties are the strongholds of conservative investors seeking steady income streams with minimal risk exposure. These assets typically require minimal oversight, boasting credit-worthy tenants locked into long-term leases. Typically occupied by credit-worthy tenants under long-term leases, core properties deliver consistent cash flows with minimal volatility. Examples include NNN properties with lengthy leases like necessity-based retail or Amazon distribution centers. This is the most passive of the four strategies.

• Risk
  Core investments present low to moderate risk, characterized by stable cash flows and minimal volatility in property values.

 

Core Plus Real Estate Investments

Building upon the Core foundation, Core Plus aka growth and income investments strike a delicate balance between stability and growth. These properties, while possessing similar quality attributes to Core assets, offer opportunities for value enhancement through strategic interventions. Owners may leverage management efficiencies or undertake light property improvements to augment cash flows. Think apartment buildings, self-storage, senior living or student housing. These are investment grade assets.

• Risk
  Core Plus investments entail slightly higher risk compared to Core, attributed to the potential variability in cash flows resulting from management interventions.

 

Value-Add Real Estate Investments

Venturing into more dynamic territory, Value-Add investments embody a strategic pursuit of growth opportunities. These properties usually start with minimal cash flows and exhibit deficiencies such as occupancy challenges or deferred maintenance These properties often start with minimal cash flows but harbor the potential for significant returns post-value enhancement. They may have occupancy challenges, management issues or deferred maintenance, necessitating more hands-on management and strategic asset repositioning.

• Risk
  Value-Add investments carry moderate to high risk, underscored by the inherent uncertainties associated with property rehabilitation and market positioning.

 

Opportunistic Real Estate Investments

At the tip of the risk-return spectrum lie Opportunistic investments, characterizing bold ventures into uncharted territories. These endeavors embrace complicated, groundbreaking projects such as ground-up developments, vacant property acquisitions or ambitious repositioning initiatives. While promising the highest potential returns, they demand seasoned expertise and meticulous full-scale development or re-development opportunities execution.

• Risk
  Opportunistic investments embody the highest risk, underscored by the complexity and prolonged timelines associated with groundbreaking projects.

 

How DSTs Typically Rate

Since typical DST investors are seeking tax deferral, consistent and reliable income, preservation of capital with reasonable returns aka SWAN (sleep well at night) investments, DSTs are not opportunistic in nature.

Within the DST structure we typically find Core and Core Plus assets that provide stable duplicatable cash flow. Industrial buildings (i.e. Amazon distribution centers), necessity-based retail such as grocery stores, pharmacies, medical offices and other Triple Net Lease Assets (NNN) assets might be considered more of a core asset with minimal moving parts.

At the same time we may see light Value-Add in some asset classes. Examples could be Class A multifamily, self-storage, senior and student living. Possibly the property is an older vintage in a great location and needs a light update to the unit finishes and amenities. Sometimes a property is purchased from a developer or from an operator who was not efficient in their leasing and management strategies. This scenario allows the sponsor (asset manager) to assemble a business plan that creates efficiencies to enhance/drives rents, manage expenses and push NOI (net operating income) that create a better tenant experience and potentially better overall return for DST investors.

We don’t see heavy Opportunistic Offerings given the DST structure and its limitations outlined by the IRS (read our seven deadly sins blog for more on this).

At DIS we take a similar approach and apply similar methodology to the sponsors we work with and how we select offerings for a client and their portfolio. When investing in a DST we feel it is vital to choose a sponsor with a strong long-term track record (see our article on due diligence) as some asset classes require a more hands-on management strategy.

To see some of these types of properties you can log-in or set-up a free account here.

We can help you distinguish between investment opportunities and suggest strategies that fit your short- and long-term needs. Call 949-379-2080 to set up a complimentary portfolio analysis and to answer any investment questions you have.

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