A value add property allows real estate investors to increase its value over time. Value add properties are a sector in multifamily real estate with risks, but they can eventually be very successful.
Although investing in value add properties can be highly beneficial, you should understand the various investment strategies to avoid high-risk commercial real estate investments. Many experienced and passive investors use the value add investment strategy when dealing with multifamily real estate investments.
Value add investment strategy often has less risk compared to several other types of commercial real estate deals.
This article explains why you should invest in value add properties. We’ll also discuss its role in multifamily real estate investing, characteristics, and tips for properly investing in a value add property.
Before investing in value add properties, you should know that a value add property takes up a lot of resources at the initial point of purchase. This is because these buildings are often in poor condition, needing significant rehabilitation and maintenance.
Hence, many investors shy away from this real estate investment strategy. Surprisingly, value add properties often yield profits.
If you need a sign to invest in one, here are six reasons why you need to invest in a value add property.
One of the most vital real estate investment goals is to increase capital. Investing in a value add real estate property provides an opportunity to greatly increase your capital, especially when the property rises in value.
Potential Increase in ROI
Although value add real estate properties have a high-risk profile, they are more beneficial than core properties. There is always potential for a huge leap in your return on investment.
Once you can look past the risk spectrum and cost of property upgrade, a value add real estate investment is simply a goldmine. Immediately after capital improvements have been made, the market value starts to rise.
As you continue to make other upgrades to the property, it becomes a lot easier to get a good ROI due to its improved market conditions.
Long-term Cash Flow
Another reason to invest in a value add investment property is that it eventually provides a steady, predictable cash flow. As a part of multifamily real estate investing, a value add property is a good way to make a passive income and improve your cash flow.
After upgrades are made, you can choose to rent out vacant units to tenants if it’s a residential value add property. If you invested in a commercial value add property, you could rent office buildings to a company that will pay monthly or yearly rent. Whichever way, there’s always an assurance of a stable cash flow.
With proper asset selection and investment advice, value add investments have increased chances of appreciation. A common mistake most investors make is focusing more on core investments than value add projects.
Since value add real estate properties are purchased at a lower price, it is almost certain the property value will appreciate once it has been adequately improved. Besides, adding value to the property kickstarts its appreciation process.
Over time you start to benefit from this appreciation in the form of rent checks.
Affordable Purchase Price
Investing in real estate can be very expensive. A smart way to spend less when investing is to target value add properties. Experienced real estate investors understand that most property owners are often willing to sell poorly managed buildings at a reasonable price.
Hence, a lot of investors target this property type knowing the purchase option is very flexible and costs less than other investments. Most property owners are even willing to sell at discounted prices. Some even allow investors to pay installments as long a fixed price has been agreed upon.
Enhance Investment Portfolio
Being able to implement the value add investment strategy successfully means not only more yield but also a diversified investment portfolio. Whether you’re already an accredited or a potential investor, adding high-risk value add real estate investment greatly enhances your investment portfolio.
Now that you have reasons to invest in a value add property, the next step is being able to identify the potential value add investment opportunity.
Characteristics of a Value Add Property
Most investors avoid value add investments because they are high-risk ventures. However, the secret to successfully investing in these types of properties is identifying which is worth investing in.
You shouldn’t invest in some random abandoned property, simply because you feel it can be fixed. Critically examine the property to be sure of its potential value.
You can tell if an asset is a value add property if it has the following characteristics:
- The property is almost inhabited or is being occupied at low market rents.
- The property requires a substantial amount of physical improvements, interior upgrades, and in the case of commercial real estate, operational improvements.
- Raw land in an area where buildings are poorly maintained can also be a good target for a value add real estate investment.
Tips for a Successful Value Add Property Investment
Value add real estate investing can be a successful venture with fewer risks once you understand how it works. Below are useful tips to help you make the right choice when investing in value add real estate.
Carry Out Thorough Research
Before investing in a value add property, conduct extensive research on the state of the property before making a purchase. Even though you need to add ‘value’ to this type of property to get potential yields, it is important to know if it is worth the effort.
It is not enough to venture into value add real estate investing. Be sure that you won’t spend way above your budget trying to fix the property.
Decide How Many Risks You’re Willing to Take
Just like opportunistic real estate, value add real estate is quite risky. Before buying such a property, you must decide how much risk you will take.
Naturally, value add real estate investing is more labor-intensive and requires a substantial amount of capital. Hence, you must know if it is a project you’re ready to embark on.
Have a Fool-proof Business Plan
Before investing in a value add property, ensure you have a fool-proof business plan. Before investing, you should consult with an investment advisor who can help guide you through the process of investment. Having the right business plans makes investing easier and helps fast-track the performance of your property.
It is also important to ensure you have the right developmental team for better service. With the right business plan and team, adding value to your property is faster and more efficient.
Consider Your Budget
Investing in value add real estate isn’t a cheap feat. You need a large budget to add value to your property successfully. Knowing your budget helps you decide just how far you’re willing to go with making changes to your newly acquired asset.
If you’re unsure, you can consult with your financial adviser, who’ll help you sort out your finances. They can also help you know your credit score in the case that you need to take loans from the bank or lenders.
Be Ready to Add Value
The only way you can be sure to make profits from value-add investing is if you’re ready to add significant value to the asset. By adding value to an asset, you inherently ensure its appreciation.
Below are some ways you can add to or improve the value of your asset.
- Remodel the property if possible. Examine the spaces that need work and fix them. For instance, if your property has a lot of unused space, you can try to create units that will be of value to new tenants.
- You can also improve an asset’s value by repainting the exteriors of the building if needed. Keep the place clean and add some chic, modern accessories that give the place a better, more sophisticated appearance.
- For properties with low market rent or occupancy, you can make interior upgrades to improve the asset’s value. For instance changing the plumping, lighting, and other necessary amenities.
- Another way you can add value to a property is by seeking quality tenants capable of paying rent and by minimizing vacancies.
- Uniquely market your asset. Use creative marketing when targeting potential tenants or future owners for your rebranded asset.
- If your property lacks security, adding security devices like alarm systems, CCTVs, and smoke detectors, among others, can increase the property’s value. It is easier to attract tenants with such features due to their appeal.
- These changes wouldn’t last long if no proper management supervises the asset. To add value to your asset, implement an efficient management team who will oversee the smooth running of your property. Perhaps, the advantage of doing this is a reduction in operational costs.
The Bottom Line
As part of multifamily real estate investing, value add deals are usually risky. These property types operate below average due to poor management, deferred maintenance, and sometimes, age.
Investing in value add deals does require extra work, which gulps up capital, but in the long run, provides higher value returns. All it takes is making the right investment decisions provided in this article.
If you’ve been scared about investing in value add deals, our ultimate guide provides a cheat sheet for successfully navigating this type of investment. With a detailed explanation of the benefits, characteristics, and tips to help you sail freely, you can reap the profits of a value add deal.