If you’ve decided to invest in multifamily real estate– great choice. Now come some decisions. Do you prefer to invest in projects that entail ground-up new construction? Or maybe you prefer investing in a state-of-the-art class-A building. If you’re somewhere in-between, a value-add strategy may be for you.
Here’s what you should consider when looking at a value-add strategy for your multifamily real estate investing.
A value-add strategy is exactly what it sounds like. It involves using techniques and making adjustments to add value to the property in order to make it a better investment. In turn, the quality of the property and community for the tenants goes up at the same time.
Value can be added in the form of new amenities, upgrades, and repairs to the property and the community, along with changes to the efficiency of management and operations. A strategy like this also often includes upsells that make the property more desirable for tenants, or that offer more options for additional rent each month.
Commercial real estate investors often use the value-add strategy because it helps them make more money over time. That means their investments are more secure, and the property’s cash flow is likely increasing. Not all real estate investors will focus on value-add options, but many of them see the importance of finding legal and ethical ways to improve their investments. This strategy meets those criteria, making it a popular choice. There’s the added benefit of making the property nicer, cleaner, and more modern, which attracts good-quality tenants and could lower the turnover and vacancy rates, too.
The reason a value-add strategy works so well is due to the concept of forced appreciation. In other words, the investor or the REIT that owns the property makes improvements to the property which raises the value.
That forces the property to appreciate and to be worth more when it is assessed, but it is also seen as more valuable in the eyes of prospective tenants. With a higher value and more upgrades and amenities, the property will command higher rents. Those higher rents mean more income — and a more lucrative investment — for anyone who has a financial stake in that property.
There are a number of ways to add value to an existing apartment building. The most common examples include cosmetic repairs, community upgrades, upsells, and management or operational efficiencies.
Some commonly made changes would be items such as:
If you’re still not sure how the implementation of a value-add strategy would benefit you as a commercial real estate investor, consider the following as an example scenario:
Property A currently has 100 units that rent for $1,100 each. All operating costs aside, this property is generating $110,000 a month from rents collected.
Now we will add value to the property by adding new flooring and appliances to those units, as well as a new tennis court for the community to enjoy.
When reassessed, the market value of those units rises to approximately $1,300 each. The property is now generating $130,000 per month from rents collected. That is an additional $20,000 per month or $240,000 over the course of a year.
This strategy is about helping investors make money, but it’s also about improving the quality of properties and communities for tenants.
A value-add strategy has a focus on bringing the market value of a property up to where comparable properties already are. It is never about raising rents to where people can’t afford them and have to move so that higher rents can be collected by new tenants. By improving the quality of the property, tenants will have better places to live and investors will see higher returns due to the forced appreciation of the property. It’s a winning scenario for everyone involved.
One of the most important things to consider when deciding to invest in real estate is who to partner with or who to invest with. When you choose to invest in properties through a REIT like DiversyFund’s, you’ll have an experienced team on your side who will source, renovate, manage, and sell properties on your behalf– all while you enjoy the benefits of being a passive investor.
DiversyFund works with Class C properties and brings them to a Class B status through a value-add strategy. This strategy offers a lower risk profile since all apartments purchased already are cash flowing.
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