What is Value Add Real Estate?
If you understand the value of investing in multifamily real estate- you are in a great position.
As a multifamily investor, there are many investment strategies you can pursue. Whether as a syndicator or passive investor its important to analyze all investment strategies to ensure it aligns with your risk tolerance and financial goals.
This article will provide you a rundown on investing in multifamily real estate utilizing a value add investment strategy! We will show you the primary characteristics of value add real estate, the benefits, risks, and the potential returns an investor might expect.
In short, a value add property is an investment property that offers investors the opportunity to increase an assets cash flow through renovations, rebranding, or operational efficiencies, i.e., a capable team managing the property.
In multifamily real estate, many investors have achieved incredibly strong returns from utilizing a value add real estate investment strategy.
Ready to learn how?
Characteristics of a Value Add Real Estate Property?
The degree of a value-add real estate property can vary between light, heavy, or deep value add opportunities, depending on the condition of an asset.
Here are some signals that an asset may be a value add property.
- A value add property may be experiencing below-market rents or occupancy rates.
- A value add property may be physically outdated and require various capital improvements.
- A value add property may lack proper management.
How Does Value Add Real Estate Investing Work?
With a value add investment strategy, multifamily real estate investors will purchase a value add property at a discounted price and later sell the asset in a much better condition. This aspect is similar to ‘flipping’ in single-family real estate investing!
Throughout an assets hold time, multifamily investors will make physical or operational enhancements that improve the value of an asset and force its appreciation.
Many operators will add value to an asset in the following ways:
- Implementing a new property management company.
- Performing exterior upgrades.
- Performing interior upgrades.
- Switching to new vendors.
- Reducing operational expenses.
- Making necessary tenant evictions.
- Adding in amenities.
- Implementing security (patrol, security gates, cameras).
- Improving the property’s marketing strategy.
With the necessary actions in place, an asset’s cash flow will start to rise throughout its hold time.
Not to mention, by making these improvements to a value add property, this will, in turn, better the property’s community!
When an investor goes to sell a value add property, the asset will be sold at a much higher purchase price due to the improvements and stability of the asset.
These factors are primary examples of why value add multifamily real estate investing provides the largest returns to multifamily investors!
Things To Look Out For With Value Add Real Estate Investing
When choosing a value add real estate property, it is crucial that you understand the REAL situation of the property.
In many cases, operators may underestimate the budget that needs to be put forth to be able to increase the stability of an asset.
With a value add real estate investment strategy, you must dive deep into every aspect of your underwriting process to ensure that you have the correct business plan in place to increase the performance of your asset.
It is also important to analyze the level of risk you are willing to hold as an investor. The higher the risk of the asset the more ‘value’ the property needs to become stabilized.
In summary, when investing in a value add real estate property it is vital to ensure you have the correct team and business plan in place to ensure your value add investment strategy is effectively executed. With effective execution, value add multifamily investing can be the most lucrative investment for a real estate investor!