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Value Add Multifamily Real Estate Investment is a Great Idea. Here’s Why…

October 4, 2018

Finding a real estate investment can be an intimidating step in expanding an investment portfolio. However, real estate investments can have numerous options, bringing opportunities for both the novice and experienced investor.

For many investors, multifamily real estate investments can prove very lucrative, yielding returns not possible with single-family residential properties. In today’s economy, it would be a mistake to not consider a real estate investment as you seek to create wealth.

Value add is a real estate investment segment of that can be very profitable for the right investors.

What is a value add real estate investment?

They are properties, like an apartment building, that have a cash flow set up in the form of income producing units but are not producing to their full potential. So, the opportunistic investor will purchase the property and make improvements to the asset that will increase the cash flow generated from the property.

Improvements can come in many forms. They could be in the form of renovations, upgrades, improving the management of the property, seeking quality tenants, lowering operating expenses, or anything that will contribute to the ability to command higher rents and reduce vacancy.

Once the “value” is added and the property is producing at its full potential, the investor can sell the asset for the new appreciated value, making a substantial profit.

It is a more secure strategy

The economy is booming right now, unemployment numbers are dropping every quarter and the stock market remains strong, but things are forecasted to shift. As we saw earlier this year, the volatile stock market can change at any moment.

The real estate market can experience volatility as well. But, by investing in value add real estate investments, the investor is not just “riding the wave,” so to speak, of the real estate cycle in which values rise and increase based on numerous factors affecting the market.

To put things in perspective, multifamily property prices increased 11% this past year, compared to the 6.5% increase experienced in the single-family home market.

In adding real value to the asset, the property will not only benefit from an upswing in the market, but more stable growth in the long term is realized through the appreciation because of the improvements.

Identifying the assets

The most important part of value-add investing is finding a property with the potential for a substantial increase in cash flow. As stated earlier, this will come in the form of increased rental rates and occupancy and/or a decrease in operating expenses.

The assets offering the greatest potential are ones that have deficiencies which are contributing to the unrealized profit. Typical properties ripe for value add investing will have an occupancy rate of 50-80%. The investor will determine the cause for the vacancies and develop a cost-effective plan to rectify while evaluating the feasibility. The deficiencies could be an outdated lobby, ugly exterior, outdated units, or poor property management.

If the reason for the low occupancy is remedied, and demand for the property goes up, increased rents will be possible for the remaining units as well.

The demand for multifamily real estate will remain high

The largest generation in the United States’ workforce right now are the millennials. Their power in the consumer market has increased over the last decade and they are now entering the real estate market in high numbers. Many in this demographic are moving out of their parent’s home for the first time and are looking for housing in urban environments, where multifamily real estate is in high demand.

As the sluggish economy in the past prevented many from going out their own, they now represent a substantial percentage of the job market and carry enormous spending power in all financial sectors.

The strong desire to live in the urban environments near employment and entertainment will continue to fuel demand as more and more of the younger generations seek housing. The cost of living in these metropolitan areas make it almost impossible for many to purchase a home, leaving renting in multifamily housing the only option.

Supply is not keeping up with demand

According to the National Apartment Association, the United States market will see the demand for an additional 4.6 million housing units by 2030, meaning an additional 328,000 new units will need to be constructed every year. At present, 225,000 units are being added to the market every year. The deficit will keep demand higher than supply, which will increase rent prices and contribute to the appreciation of the multifamily units.

Innovative ways to enter the market

A relatively new approach to real estate investing is crowdfunding to raise capital for investments. Aggregating the dollars allows regular investors to access the lucrative real estate market with relatively small amounts of money–something that was never an option for average Americans in the past.

With DiversyFund’s Growth Fund, investors are able to immediately diversify their portfolio with one investment. The diversification through the access to numerous projects is a huge benefit as the investor can grow their real estate investments while reducing some of their risk.

By adding multifamily real estate to your investment portfolio through DiversyFund’s platform you can reap the benefits without having to fork over high broker fees. With secure payment portals and easily navigable dashboards, tracking performance could not be easier.  

As you seek to increase your wealth and live like the 1%, don’t underestimate the potential in value add real estate investments.

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