Real Estate Investment Risk Profiles

Similar to a mutual fund, a real estate company will pursue opportunities that fit within its risk profile. Companies looking for high returns will invest in high-risk assets. Companies looking for steady cash flow will invest in low-risk assets.

In real estate, risk profiles are broken out into four categories:

• Core
• Core Plus
• Value Add
• Opportunistic

Core = Lower Risk/Lower Returns

These investments are the most conservative and lowest risk of the four classifications. A core property tends to generate predictable, steady cash flow and is positioned in a strong market. The building is usually 100% leased to a group of strong tenants. Due to the lower probability of sustaining a loss of investment, these properties are easily financed. The downside to the low risk is little potential for outsized returns. Typically REITs, insurance companies, and banks will invest in these conservative assets.

Core Plus: Moderate Risk/Moderate Return

A core plus investments has some similar attributes as a core investment. These properties are generally located is good markets with a strong tenant base. However, these assets carry a slightly higher risk of decreased net operating income (NOI) due to factors such as upcoming lease rollover, a small amount of vacancy (<10%), or a location in a less favorable market. Core plus appeals to the same type of investor as core opportunities

Value Add: Medium-to-High Risk/Medium-to-High Return

The name explains what this strategy is: the investor is looking to add significant value to a real estate investment. A value add property typically has a high amount of vacancy or some physical obsolescence, though one usually drives the other. Due to the less than favorable real estate, a value add investor can buy these properties at a discount and then work to increase the value. Once the property has been stabilized, the property can be sold to a core investor at a much higher price than it was purchased for. Real estate private equity companies are the main investors in this space

Opportunistic: Higher Risk/Higher Return

These properties require the most enhancement in order to generate the expected level of returns. Properties that fall into this category include ground up developments, redeveloping a property to a different use (ex. turning a warehouse to a retail center), and real estate located in emerging markets. Opportunistic investors are willing to take entrepreneurial risk to achieve outsized returns. Developers and real estate private equity companies are the typical investors in this category.

Check out our Real Estate Career Guide for even more information on the different risk profiles!