When evaluating a potential multifamily acquisition, there are many factors that should be considered to determine the best investment approach. There are four common types of multifamily investments: Core, Core Plus, Value-Add, and Opportunistic properties. Each has its own potential for risk and value.
What are the 4 types of multifamily investments?
CORE
The most conservative approach is through Core investments, which are properties that offer stable cash flow, typically due to being fully or nearly fully occupied, and are high quality and/or in a prime location. A benefit to Core properties is predictability. However, because of the low risk of investing in these properties, there’s also a lower return.
A good example of a Core investment is a new multifamily development in downtown Dallas. Residents have top-of-the-line amenities featuring resort-style pools, indoor golf simulators, resident lounges, and state-of-the-art gyms.
CORE PLUS
Properties that require some improvement to increase their value, such as a multifamily property needing minimal renovations, are known as Core Plus investments. Core Plus properties tend to be well-located with high occupancy.
These properties have a slightly higher risk profile than Core investments but in return for the perceived additional risk, have a chance for higher returns. The benefit of this moderate-risk strategy is that an investor can generate steady cash flow with minimal renovation.
An example of a Core Plus investment would be a 15–20-year-old multifamily property that is well-located but needs the parking lot and leasing office to be upgraded.
Value-Add
Properties that require extensive improvements/renovations and management changes are called Value-Add investments. These properties are typically underperforming relative to other properties in the submarket and have lower rents. Usually, extensive exterior and interior renovations are completed within the first two years of acquisition.
This approach has a higher risk profile than Core and Core Plus investments but has the potential to yield much higher returns.
A good example would be a 15–40-year-old multifamily property that needs a new roof, parking lot, landscaping, leasing office, gym, and interior units. The investor will typically allocate $8-18K per unit to install new appliances, flooring, paint, lighting, and cabinets.
Opportunistic
The riskiest investment approach is through Opportunistic investments, which involve investing in properties that require significant attention to become profitable. These properties will have challenges in at least one of these areas:
– Condition: Properties in need of significant repairs, or those in foreclosure (or even abandoned)
– Management: Properties that are poorly managed, leading to low occupancy, rents, and/or local reputation
– Use: Properties that could be profitable if utilized in a better way through major upgrades or a complete conversion
There are many potential challenges with Opportunistic investments, including debt issues or legal issues, but these properties may yield the highest returns and can add great value for investors willing to take on the added risk.
Sign up for access to view future investment opportunities.
How should an investor choose which type(s) multifamily investments to pursue?
Risk/Return Evaluation
As we’ve discussed, each type of property comes with its own risk and return characteristics.
For investors willing to take on more risk and put more effort into generating value, Value-Add and Opportunistic properties typically have the potential to yield significant returns. However, these strategies require upfront investments of both time and capital along with an experienced team that can execute to deliver a higher ROI.
Investors who are comfortable with less risk and/or who can’t – or simply don’t want to – put additional time, effort, or capital into a property, may opt for Core or Core Plus properties. These properties are typically performing better than their Value-Add or Opportunistic counterparts, and therefore require less intervention (such as minimal renovation to allow for rent and occupancy growth) to generate value.
Time Horizon
An investor’s time horizon also plays an important role. Investors often prefer to sell Value-Add and Opportunistic properties more quickly to take advantage of forced appreciation, while they tend to hold Core and Core Plus properties longer due to prolonged stability.
Market Conditions
Current market conditions should always be a key driver of your investment decisions and will directly impact your return profile.
For example, it’s often wise to invest in a Core or Core Plus property when:
– You or your capital partners prefer less risk and longer hold periods
– Your investment thesis is location-based
– You are yield driven rather than total-return
A Value-Add or Opportunistic investment may make sense when:
– You or your capital partners prefer a higher return profile
– Your investment partners are total return rather than yield-driven
– A downturn in the real estate market occurs, creating opportunities for investors to acquire properties for less and ultimately sell them at a profit (if managed correctly)
– Changes happen in the area that affect demand, such as in population demographics, population density, or zoning
– You or your capital partners are highly familiar with driving value through low-performing properties and can execute accordingly
Ultimately, all these considerations are important when choosing an investment. Your capital partner’s ultimate risk profile should be the driving factor, assessed against the possible volatility and profitability of the property and market.
An experienced sponsor who has access and can diligently vet deals within the given risk parameters for their capital partners is an invaluable resource.
Why invest with Discover Multifamily?
Our approach to investing is to carefully consider all potential elements of risk through rigorous stress testing, ensuring we deploy our investor-partners’ capital with confidence. We allow data and insights to drive our decision making, not emotions. The properties that we acquire in our portfolio have passed rigorous due diligence requirements and have been extensively stress-tested through our proprietary modeling/systems. We are value investors not speculators.
As a leading sponsor, Discover Multifamily invests significant amounts of capital directly alongside our capital partners to form a true partnership.
Sign up for prioritized access to new investments as they become available:
