Value Add Real Estate Property Definition And Strategy

Value Add Real Estate

Value add real estate (also known as “value-added”) is a property investing strategy that refers to any investment that provides an increase in asset value. In the most basic terms, it refers to improvements made to a property that increases its market value above historic levels and beyond what might have been expected from simple capitalization of rental income.

What is value add property

Value add real estate is a type of real estate investment that focuses on buying underperforming assets with the goal of improving their performance. It is different from core real estate, which aims to generate stable cash flow and consistent returns, and from opportunistic real estate, which focuses on investing in assets with the highest potential returns.

Value-added real estate investing can take many forms, but it generally involves investors purchasing properties for less than their full value and increasing their earnings through improvements or other changes.

Value-add real estate is a strategy in which an investor purchases a property that has the potential for greater value through renovation and repositioning, or through improved management. Examples of value-adds include:

  • Making cosmetic improvements, such as painting walls, replacing flooring or upgrading fixtures
  • Making major improvements, such as renovating kitchens, adding new bathrooms or finishing a basement
  • Converting a single-family home into multi-tenant units, or vice versa
  • Adding an addition to the house (like an extra room or a garage)
  • Developing the land around the property
  • Upgrading amenities, like a pool or club house
  • Developing commercial space in a residential building
  • Converting office space into retail space

The value-add approach is popular with investors because it provides the opportunity for higher returns than those typically associated with core properties. Value-add properties are often distressed or low quality, so the investor can purchase them for a lower price than similar properties that do not present any investment challenges. The risk associated with value-add investments is also higher than that associated with core investments, although well-managed value-add portfolios have some of the highest returns in commercial real estate.

Benefits value add real estate

The benefits of value-add real estate investment are numerous and can include:

  • An increase in rental revenue from higher rents and/or improved occupancy
  • Decreased expenses from lower vacancy, better management, improved operations, reduced turnover, and more effective maintenance practices
  • Increased net operating income (NOI) that drives up property value
  • Stronger cash flows due to higher NOI
  • Improved resale value that makes it easier to sell the property when the time comes
  • Potential for increased returns on investments
  • Ability to recognize results as improvements are made
  • Potential for tax benefits through depreciation and capital cost allowances
  • Improved cash flow during renovations and after completion

Risks in value add real estate

Value-add real estate investing is appealing to many investors, with the potential for higher returns over core opportunities. But the risk and rewards of value-add come with a tradeoff. Value-add properties are typically less cash flow stable, more management intensive and more exposed to market fluctuations than core assets.

Here are some of the risks involved in value-add investing:

Management Intensive – Value-add properties typically require more hands-on management than core investments. This may be from ongoing capital improvements or from leasing up vacancies or redeveloping vacant space.

Highest Risk – The riskiest investments are typically those that need significant improvements, redevelopment or rebranding in addition to leasing up vacancies. These properties will likely not generate significant income until renovations are completed and there is sufficient occupancy to cover operating expenses. 

How can real estate investors add value to properties?

Ingenuity and creativity are required for value-added investing. Investors must have the ability to recognize opportunities that others may overlook. Any decision that boosts revenue while cutting costs might be considered a value-add. The more of these opportunities an investor identifies, the more value he or she will be able to deliver to both investors and apartment tenants.

Finding older, unrenovated apartment complexes with below-market rentals is the most typical method. The rentals have been raised to market value once the flats have been renovated.

When the local real estate market for that property is recovering or expanding, a value add investment is usually the greatest option. This might happen after a recession, as the market begins to recover. Property values and rent may still be modest at this time.

Conclusion

The concept of value-added investment is intriguing and timeless. One technique for multifamily apartment complex investment is value-add real estate investments. It can be a profitable investment depending on your risk tolerance and investment timeline

Value-add performance will become increasingly dependent on investors’ market understanding, flexibility to adapt, and adherence to a disciplined strategy as rent growth stabilizes and interest rates rise in the future..

Interested in learning more about Value add real estate investing?

Give us a call or check out some of the other free resources we have available at Growth Capital Group.

3 Effective Strategies For Buying An Apartment Building

Buying an apartment buildings

Investing is a way to make your money work for you.  Buying an apartment buildings has been a winning strategy for many throughout history. This type of real estate investing is profitable because it provides a good return on investment most of the time. Until today, there is still a need to invest in this kind of property whether it’s for you and your loved ones or for your business. Here are the things you need to know about investing in apartments.

This article will cover the three most effective strategies you need to consider before buying your own apartment building. There are many ways to invest in apartment buildings. These include investing in a REIT, investing in a private fund, being part of a joint venture, buying your own building

An apartment building has a lot of operating costs, and if you’re looking to make money investing in apartments, you need to be able to cover those expenses with the rent you collect. The more units a building has, the more money it takes in, so bigger is usually better. You want your investment to appreciate, but you also want it to be cash-flow positive. 

Here are three of the most effective strategies to make money investing in apartments:

  1. Identify Affordable Housing Markets

Affordable housing markets allow you to buy rental properties at a significant discount compared to similar markets. For example, if you were to buy a four-plex in southern California, it would probably cost more than $700,000. If you were to purchase the same four-plex in Pine Bluff, Arkansas, the price could be less than $200,000.

TIP: The million-dollar question is “How do I find affordable housing markets?”

There are two ways to identify affordable housing markets: looking for distressed properties or spotting trends and identifying areas poised for growth.

If you’re looking for distressed properties, you should start by identifying neighborhoods with high crime rates, high foreclosure rates, and low-income levels. These neighborhoods are likely to experience a lot of new home construction in the next five years as investors gear up for rehabilitation projects. When this happens, the demand for rental properties increases, and rental rates increase as well.

The second way to identify affordable housing markets is by identifying trends and potential growth areas. For example, in 2006 there was an explosion of foreclosures and vacant homes in Florida due to Hurricane

  1. Buy up-and-coming neighborhoods

Another strategy is to buy up-and-coming neighborhoods instead of established ones. The idea behind this strategy is that you’ll be able to reposition the property by investing in renovations or upgrades as the neighborhood improves over time without needing to raise rents as much as you would otherwise need to do so. This strategy requires more work than simply buying into a hot market, but it can pay off if done correctly.

  1. Buy distressed properties

Finally, one of the most effective strategies for making money is to invest in distressed properties—that is, properties that are currently owned by lenders after having gone

Advantages of Buying an Apartment Buildings

Investing in apartment complexes can be a great way for investors to build their portfolios and their income streams. It is a form of real estate investing that many people don’t consider, but it can be a great way to diversify your investments, grow your net worth, and create steady cash flow. Investors who are looking to buy apartments for investment should consider the following advantages:

  1. Diversification 

Investing in apartments is a great way to diversify your real estate portfolio. In addition to buying single-family homes, duplexes, and other forms of residential real estate, you can also diversify by buying an apartment and renting it out. Many investors choose to do this because they feel it gives them an opportunity to have a steady rental income while also giving them the opportunity to see the value of their property appreciation.

  1. Appreciation 

You can often see higher rates of appreciation when you invest in apartment buildings than you would see with other forms of real estate investing such as single-family homes or duplexes. This is because these buildings tend to provide higher occupancy rates as compared to other kinds of properties.

  1. Cash Flow

Most apartment buildings need some form of upkeep so there will always be some sort of maintenance cost associated with the building.  Factor in the monthly mortgage payment and determine if the actual rent collected can support the total cost to operate the property.

Conclusion:

The market is there, but you will have to do your research. You will be able to make money, but you cannot make a killing. A good investment opportunity that is not right for everyone but perfect for people who want to take on some risk and in return get some good returns well into the future.

Authored by:

Mike Desrosiers

Founder | Growth Capital Group

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Should You Invest In Apartments? (And Why You Should)

invest in Apartments

Apartment investing is a great way to diversify your portfolio, create income and enjoy tax benefits. But other investment strategies may offer some of these benefits, but not as strong as though with apartments. So the question we all have (especially if you are newer to the industry) is: is it worth it?

There are many ways to invest in apartment buildings. These include investing in a REIT, investing in a private fund, being part of a joint venture, buying your own building, and investing in syndication. In this article, we will compare the two popular strategies: being part of a joint business venture and buying your own building

We can see how apartments have historically faired in general terms. A prominent economist, Dr. Peter Linneman, compiled an outstanding analysis that measured the performance of commercial property over any 10-year holding period on NCREIF, the leading real estate performance index. On average across all asset classes, any 10-year hold period would have yielded an 8.3% return. 

If you had invested in apartments for the past 10 years, your investment would have outperformed all other asset classes. This is partly because apartments have historical returns of 9.4%. Apartments also have the least risk, with a standard deviation of 2.1% compared to 2.6% across all asset classes. Past performance does not predict the future, but history is all we have to make our best attempt. Apartments have outperformed all other asset classes on average, in the worst 10 year period and in the best 10 year period. Apartments also had the least risk of any asset class.

To illustrate this point, we have conducted an unlevered analysis—one free of debt. It is important to note that apartments have a wide variety of benefits, the most significant being their low debt burden. Compared to their peers, they receive favorable terms from institutions such as Fannie Mae and Freddie Mac. Although other real estate asset classes are valuable in their own right, apartments historically have proven to be a reliable investment.

Thus, if you are still with me, you are likely interested in learning more about apartment investing. And I have only touched on one of the many benefits of this investment strategy, namely that it offers investors a chance to use leverage to magnify returns. In addition, investors can collect consistent cash flow and take advantage of real estate tax breaks. So is apartment investing worth it? That depends on your goals and circumstances as an investor. But for serious investors who can invest for at least five years and do not need immediate access to their investment funds, yes, apartment investing could be right for you. All that said, should you try to buy your own building or seek out an experienced operator? Of course, it’s up to you—the prudent investor will carefully consider both options before making a decision.

Pros and Cons of Investing in an Apartment

Buying your own building can have several advantages. . You will be able to control your deals and have a say in when you buy and sell, what financing choices you have, and how you manage your property. Nonetheless, there are disadvantages of purchasing a building: first, if you do not have experience, it will be difficult to manage the business; second, if you do not have proper experience and education in real estate investing, you may underestimate or overestimate your expenses and revenue; third, if you do not have access to capital or experience being a landlord (or both), finding financing for a building may be difficult; and lastly, if you do not have significant capital nor access to capital (or both), you may not have the ability to purchase larger buildings that could offer better economies of scale.

An alternative to buying your own apartment building is to invest in multifamily syndication. To be clear, syndication is the pooling of resources for a common goal, in this case, financial growth for investment properties. With the combination of professional experience, relationships with brokers, ability to find and acquire quality deals, ability to optimize an investment property’s operation, and access to good financing terms through a network of lenders—an experienced operator can help you take part in multifamily housing investment deals as an equity partner with little or no out of pocket expenses. The best part? You can now be part of a larger, institutional quality deal with limited funds.

If you have little or no financial capital to invest, you might be unable to participate in syndication. However, there are many other aspects of the multifamily industry that can provide value. For example, deal finding, being on-site, and raising capital are all valuable skills and there are a multitude of resources available for free

To decide what’s best for you, the following questions need to be answered:

Do you have the time?

Do you want to invest in your backyard?

Do you want to manage tenants?

Do you want to learn how to underwrite and identify deals?

Consider investing in your own buildings and partnering with experienced operators if you can answer “YES” to all three questions. If your answer to most or all these questions is “NO,” you can use an operator as a passive way to invest in real estate. However, you still need to learn about the operator and the deal. This may take time, but it is much less than what it takes to become a good operator yourself.

So, should you invest in apartment buildings? If you have read this far, the answer is probably YES. While I would not recommend plowing $50,000 into a syndication, but If you have saved enough money to invest in a syndication, go ahead and give it a try.  You still have several other ways of getting involved in the process, so identify what works best for you and go from there.

Authored by:

Mike Desrosiers

Founder | Growth Capital Group

Join a community of investors working

and partnering together to build wealth