We love value add deals and so should you. Here is why.
We love value add deals. When looking for a way to increase your personal net-worth, real estate investing is a great idea. While turnkey properties may be alluring because of the ability to quickly flip them or start renting them out, value add properties are also a great way to diversify your real estate investing portfolio, often for a lower initial cost. Understanding what value add properties are, why their beneficial and how they can be the key to your long-term success as an investor will allow you to start looking at more properties when you’re scoping out your next investment.
What is a Value-Add Property?
Value add properties are those that need some work done to them in order to reach their full potential. You may have watched one of the dozens of house flipping TV shows and seen how the hosts talk about the improvements they need to make to the properties before they can sell them. Those properties are value add properties. These may be residential properties that have been abandoned and fallen into disrepair, a home that is simply outdated or a commercial facility that isn’t completed. All of those properties need work in order for you to be able to sell them or rent them. They need value added to them, hence the term “value add” property.
There is no questioning the fact that value add properties are a riskier investment than turnkey properties. Even if you work with a licensed contractor to help you put together an estimate of what it would take to bring the property up to par, there may be hidden costs that aren’t uncovered until you start tearing up floors, ripping out walls and uncovering the guts of the property. However, once you accept the fact that there are risks involved in value-add properties just like there are in any other real estate investments, you also recognize the fact that there is great potential in value add property investment.
Why Do We Love Value Add Properties?
One of the scariest parts about any type of investment, especially real estate investments is the fact that so little of the success or failure of a particular investment is out of your control. When you buy a stock listed on the New York Stock Exchange, you have no control over the success of the company. When you purchase a real estate investment property, there are many aspects of the success of the property that you have absolutely no say in. Market trends, economic patterns, laws of supply and demand and other factors largely dictate the long-term success of any investment property. With value-add properties, you have control over aspects of the property that you don’t have in traditional real estate investments.
Here are some value-add strategies we look at when we search for multi-family properties.
Renovating the amenities and property exterior
Renovating the apartment unit interiors
Finding properties that have below market rents and work towards increasing the rents to market.
Applying a Ratio Utility Billing System (RUBS) to charge back utilities to the tenants.
Bringing in a property manager that can manage the property with efficiency and by implementing cost reductions.
Why You Should Love Value Add Properties
Outside of the increased amount of control you have over the investment, value add properties also provide a financial benefit. Generally speaking, properties that are not move-in ready can be purchased for significantly less than their turnkey counterparts. Yes, they do require you to invest more than the purchase price, either through more money or by your own sweat equity, but the lower purchase price provides a great chance for an increased return on investment.
Value add properties are not for everyone. In order to maximize your return, you generally have to be able and willing to do physical labor on the property that you’re investing in. However, the lower prices and increased control for the investor provides a great chance to diversify your investment portfolio while building your own personal net-worth through strategic real estate investing.