One of the critical markers of the modern real estate investment world is the sheer variety of opportunities open to investors to diversify and offset the risk of markets and inflation. Many options exist with differing investment strategies and markets, from brand-spanking new multifamily complexes in major metropolitan cities to wooden cabins in the Alaskan wilderness.
One of the fundamental ways professional investors and real estate insiders measure property types is their risk portfolio and potential for value creation. Insider real estate terms define this risk and value to help quickly classify these assets.
Therefore, understanding multifamily real estate terms will help you better understand the risk appetite of a particular investment opportunity and the pros and cons of a specific investment. In today's blog, we'll break down three asset types: value-add, core, and core-plus, and how Viking Capital manages these property types to create a diversified and risk-adjusted opportunity for investors.
What Is a Value-Add Property?
A value-add property is a multifamily real estate investing opportunity in which, through capital changes, an asset's value can be increased (i.e., have value added).
Suppose a property is managed poorly, has periods of low occupancy rates, or is outdated and requires renovating or updating. In that case, these are signs that the property may be a value-add as the investor or firm can implement changes to reverse or amend these problems. This is the fundamental strategy of individual investors such as house 'flippers' who take houses and re-market them after making changes.
Because a value-add property requires updates, it can be considered a higher-risk investment. However, this risk is balanced against a more significant upside (potential for higher cash flow). As a result, real estate funds may include these property types to boost the potential for a higher return on investment or more significant equity for investors.
What Constitutes a Value-Add Improvement?
A value-add property requires a higher capital investment to make necessary changes to increase rental income and boost appreciation following progressive stages.
Some examples of value-add changes include adding modern amenities to an outdated property or upgrading the exterior of the building. However, these additions need not be physical. For example, changes such as replacing troublesome residents with better-vetted residents could be considered a value-add improvement to a property.
Some additional value-add improvements for real estate properties might include:
- Upgrading unit interiors (refurbishment or updates to bathrooms and kitchens, such as the addition of stainless steel appliances)
- Modernizing community amenities
- Operational efficiency improvement (changes to management and internal systems)
- Rebranding and elevating the property marketing strategy
- Tax appeal and mitigation
- Sustainability and green energy improvements (smart meters, LED lighting)
- Reducing vacancy with better tenants
- Offering resident satisfaction packages
- Revenue sharing platforms
This is by no means an exhaustive list. Since value-add is a loose definition, any changes to the asset to increase its economic value may well be considered a value-add. However, the value-add improvements listed here form the basis for the Viking Capital investment strategy value-add upgrades.
What Is a Core Property?
A core multifamily property is generally considered the lowest risk investment of the three options. Core properties are Class A properties in Class A locations.
They are generally defined by consistent and solid occupancy rates (which have historically remained stable). They also often have modern amenities (with high-end finishes) and require minimal upgrades to attract tenants in established and appealing living zones.
Core properties are desirable for a multifamily housing investment group as they offer stable returns, consistent cash flow, and attract high-quality tenants.
What Is a Core-Plus Property?
A core-plus property is just below a core investment property in terms of the risk level. This would put them within the low to moderate risk level.
This means that a core-plus property still has a reasonable occupancy rate in a pretty good area with some possible updates pending. In addition, core-plus properties generally have high-quality tenants, much like a core property.
Similar to a value-add, they may offer opportunities to increase the value with capital investment and management changes. However, these updates will not be as extensive or capital intensive as those of a value-add investment.
Why Does Viking Capital Focus on These Property Types?
Viking Capital exists to empower accredited investors through creating long-term generational wealth and financial freedom by investing in the multifamily real estate market.
Because of this, our strategy focuses on properties that provide value and capital preservation for our investors, including two key property types from those mentioned above.
Our Value-Add Business Plan
The Viking Capital strategy includes purchasing vintage multifamily properties from the 1980s to the early 2000s with 200 to 400-unit garden-style apartments below market rents.
We then 'add value' by raising the existing market rents to the market average by implementing a multi-step strategy. Viking Capital also upgrades the property exterior and strategically enhances the apartment interior.
We also optimize operational efficiencies, further boosting yield to our investors while creating an outstanding community and environment for tenants. We aim to ensure our assets achieve best-in-market rents and attract high-quality tenants.
The Viking Capital value-add investment strategy offers 13-15% returns with variability due to the upside potential.
Our Core-Plus Investment Opportunities
Viking Capital also purchases post-2000 vintage properties in affluent Tier 1 cities regarding core-plus investments. Additionally, we focus on areas that require amenities and luxury upgrades while implementing marketing enhancements.
We also streamline expenses and implement artificial leasing technology. Our core-plus investments create significant upside for investors during Viking's ownership tenure. This means the returns sit around the 7-10% mark with little variability.
Learn More About Real Estate Funds with Viking Capital!
Understanding how real estate specialists refer to assets and structure their funds brings you one step closer to realizing your dream of financial freedom through real estate. Insider multifamily investing terms such as value-add, core, and core-plus don't have to be offputting! They're simply ways to classify assets into various levels of risk due to their features, such as age, location, and occupancy.
Viking Capital creates value while focusing on capital preservation for its investors through the security and potential upside of core, core-plus, and value-add assets. If you want to learn more about real estate funds or are interested in diving deeper into the Viking Capital investment opportunities, reach out to a team member, and let's talk.
