Real estate investing isn’t simply the purchase of property. Investment strategies can take on many different forms, including investing in value-add real estate. These properties are those that already generate cash flow but can see better profits with the addition of targeted improvements. A property may be purchased at a lower price, with value appreciating over time through targeted improvements, increased rents, and better tenant retention. This is done through value-add strategy.
To understand value-add real estate, it’s a good idea to take a closer look at the term “value-add.” This refers to the changes and upgrades made to both boost income and improve the quality of life for tenants living on the property.
Pros of Value-Adds
A value-add does exactly what the name implies; it adds value to the property. For example, a REIT might invest in a property with opportunities to improve the structure, amenities, or landscaping to attract new tenants and higher rents. While this provides benefits for the investors, it also gives current and future tenants a more desirable place to live. However, there are many other benefits a REIT or individual investor might realize from implementing a value-add strategy, such as:
- Improved NOI (Net Operating Income), or an increase in cash flow
- Tax benefits through repairs and ongoing maintenance
- Higher property valuation at the time of sale
- Lower tenant turnover and higher rates of occupancy
- Engagement with the community through improvements
Types of Value-Adds
Investors can improve a rental property through a number of different types of value-add projects. Some may involve complete renovations of units, while others might be simple improvements to common areas.
Interior improvements to a property might include replacing dated appliances inside each unit, installing new flooring and light fixtures, or remodeling bathrooms and kitchens with updated fixtures and plumbing. These value-adds can be implemented as units within the property become available in order to attract higher rents as new leases are signed, so investors don’t need to undertake the renovations all at once. Ongoing improvements can signal to potential renters that your property is well cared for, and the end result when all units are renovated can increase the overall selling price.
Exterior improvements, such as landscaping renovations, increase the property’s curb appeal. By creating a more visually engaging exterior, the property can attract new residents and add value to the surrounding community. Adding or upgrading an existing playground also improves curb appeal while giving current and future residents a safe place for their children to play.
Of course, there are other options a REIT or individual investor have for improving a property through value-add strategies. Replacing washers and dryers in communal laundry rooms, upgrading a building’s HVAC system, or replacing old windows with energy-efficient designs are all great options for upgrading your investment. Adding security upgrades, such as new locks and intercom systems provide multiple benefits, protecting your investment against potential damage and theft while also helping residents feel safe and secure.
Choosing a Value-Add Strategy
REITs take potential value-add projects into consideration when purchasing a property. The cost of some improvements, particularly those costing considerable capital, must be taken into account when negotiating the final purchase price of a property, Other improvements, such as replacing locks, incur minimal expense and provide a reliable ROI.
Creating a sound value-add strategy requires balancing the needs of current and potential tenants with the needs of the REIT or investment group. Capital expenses for necessary renovations, such as replacing broken heating and air conditioning units, might be unavoidable, but smaller cosmetic improvements can be implemented without significant impacts to cash flow and profitability. A key consideration is to determine whether a value-add option will increase the value of the property. By combining a sound strategy and consistent maintenance of the property, a REIT can create a desirable property that increases in value over time.
The DiversyFund Value-Add Strategy
DiversyFund begins the process of assessing and implementing our value-add strategy immediately. We can do this because we manage all of the properties we purchase.
As soon as a property is purchased, our construction management team begins reviewing the addition to assess what steps should be taken to improve the condition of the property and create the value-add strategy. We utilize excess capital, rental income, and reinvested dividends to begin work on each property. Improvements to our properties have included extensive unit remodels, new plumbing fixtures, and completely updating the grounds and signage around many of our multifamily assets.