The popularity of “value-add” investment strategies is rising across all real estate industries as a result of Covid-19. Following the pandemic’s destruction of the previous model of core or low-risk, low-return properties, such as those with lengthy leases, many investors are searching the market for dependable and resilient returns through value-add real estate investments, which are reflected in upgraded structures.
Let’s define what we mean by “adding value to a real estate investment” first. A real estate investment that has undergone internal or external repositioning or modification with the goal of raising its value or cash flow and making it more appealing to a buyer or resident is known as a value-add investment. These investments can range from little adjustments like painting walls or changing furniture to significant undertakings like property expansions, depending on whether they need a lot of capital, labor, or both.
How To Add Value To Property
Three ways exist for us to add value:
- Increase in Market or Natural Value
Market or natural appreciation is the first way that real estate owners or investors can raise the value of their investments. Here, an investor makes an investment in a rapidly expanding market with a high employment rate, a rising population, and a positive net migration rate. By making investments in these markets, you will inevitably enhance the value of your real estate, which will force you to gradually raise rents to keep up with the expanding market.
- Renovating or refurbishing real estate
By using a “value add” technique, you can actively raise a property’s value rather than wait for the market to rise. This entails improving or renovating some aspects of the property. Using a residential building as an example, you could install new appliances in the kitchen, such as a refrigerator, oven, and dishwasher, as well as paint the entire apartment. You will be able to raise the rent due to these aesthetic and practical upgrades, and the resulting increase in rental income will raise its net operating income (NOI). The NOI and the property’s value are inversely associated; as the NOI rises, the property’s value decreases, and vice versa.
- Offering facilities or services
Creating other revenue streams in addition to rent is another strategy to increase the value of your real estate property. If you offer amenities like a gym for an apartment building, a common area for socializing, and services like cleaning and laundry, residents will find your property more appealing and convenient than if you leave them to find these things on their own, which will raise the value of your property.
Benefits Of Adding Value To Property
An investment property’s overall cash flow is increased by adding value since costs like repair and upkeep are either eliminated or decreased because they are less likely to occur. Contrary to the core or core plus properties, this raises the value-add investment’s NOI (Net Operating Income), resulting in higher returns for the investor and a higher ROI compared to core investments. Some investors have a tendency to sell the property right away after renovations or to cling onto it in a down market and then sell it when the market picks up in an effort to profit from the increased worth.
Things to Watch Out for When Adding Value To Real Estate Investment
Understanding the REAL condition of the property is essential when selecting value-added real estate.
Operators frequently underestimate the amount of money necessary to invest in order to improve an asset’s stability.
In order to make sure you have the right business plan in place to improve your asset performance when using a value-add real estate investment strategy, you must thoroughly examine every step of your underwriting procedure.
Analyzing the level of risk you are prepared to accept as an investor is also crucial. The more “value” a property needs to stabilize itself, the higher the asset’s risk level.
During this time period, it is important to be aware of the many ways in which an investor may add value to their real estate investment. By taking these steps into consideration, you can make sure that your investment has the best possible chance at long-term success and growth.
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