Is Value Add Real Estate The Right Strategy For You
Choosing the right rental property to invest in can be amazingly difficult at times unless you know the right question to ask.
The most successful real estate investors dont focus on asking price, potential appreciation, or how much money they might make. Instead, they begin the search for their next acquisition by asking a very basic question:
Does the amount of risk and potential reward of this opportunity match my investment strategy?
Many investors today are discovering that value add real estate offers the best balance between risk and reward or in other words, the biggest bang for the buck. In this article, well look at some of the opportunities, risks, and rewards of investing in value add real estate.
Actively Managed Mutual Funds And Etfs
A mutual fund is a specific type of investment asset class. When structured properly, it can provide you with monthly passive income.
This type of financial instrument will aggregate a variety of different asset classes. You can buy mutual funds that consist of many kinds of stocks, bonds, or other mutual funds. Buying a share in a mutual fund is similar to buying any other stock. The fund prices will go up and down, and you can buy and sell a share with very similar levels of flexibility.
Unlike other passive funds, like index exchange-traded funds, mutual funds are professionally managed. Fund managers and other financial professionals personally curate funds, spending time working with others to ensure that the fund is balanced to meet the goals of the investors.
It is important to remember that different funds will have different financial goals, including providing growth vs. income investing options. If you are interested in drawing monthly payments from a fund, you should seek a fund offering such income.
Many funds are structured this way. These funds are often viewed as safer investments because of their inherent diversification. Professional managers should, in theory, be able to help invested individuals manage their risk and still earn a profit.
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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.
- Implementing security .
- Improving the propertys marketing strategy.
With the necessary actions in place, an assets 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 propertys 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!
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Who Is A Value
Value-add deals take some time to put together and execute, but they can be well worth the wait. Returns are historically higher than stabilized cash-flowing properties, without as much risk as new construction projects or land deals.
Value-add investors should expect to see most of their return on invested capital following the sale of the property. So, its a strategy thats best suited for someone with a time horizon between five and seven years with a moderately aggressive risk tolerance.
How The Value Add Investment Strategy Works
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GlobeSt.com recently reported that the demand for single-family rentals continues to jump. According to the article, the demand for single-family portfolios with five or more homes has increased by nearly 650%.
A huge demand like this is music to the ears of the rental property investor, but theres just one problem: There are only so many good single-family homes available on the market.
Of course, the best investors are the ones who can turn a problem into an opportunity. Thats one of the reasons the value add investment strategy is so attractive today. Some investors build portfolios of rental property to hold for the long term, while others rebalance an existing portfolio by packaging together a few homes and reselling them as turnkey rental property to another investor.
The nice thing about investing in value add real estate is that it comes in all shapes and sizes with different levels of opportunity. Here are some of the most common ways to make the value add investment strategy work in your favor:
1. Increasing rents with strategic improvements
Exterior and interior painting between tenants, updating the flooring and fixtures, and installing energy-efficient appliances can offer eco-friendly amenities to millennial renters who are willing to pay more for a nicer place that saves them money.
2. Creating additional income streams
3. Analyzing existing revenues and expenses
4. Managing your local real estate team
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Why Birgo Capital Prefers A Capital
If investors just spend enough money, they could comprehensively reposition an asset and justify sizable rent increases . If the play works, investors could earn impressive returns. But, thereâs three potential problems with that rationale:
Operational efficiencies like economies of scale or vertical integration have the potential to instantaneously add value to every property an investor buys. If investors operate properties in ways that fill vacancies, reduce costs, and improve efficiency, they can add real value without calling the bank or breaking out the heavy machinery.
Investments For Monthly Income: How To Generate A Steady Stream Of Cash
It is the dream of every investor to get access to investment accounts that pay regularly. One of the most brilliant things you can do for your financial security is investing your money into income-producing assets that will provide a steady cash flow month after month, year after year. There are many different investments for monthly income, and today we will explore a few of them. So whether youre just learning how to invest money or looking for new investment opportunities, read on for some ideas on creating a monthly income stream!
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Tax Advantages Of Value
According to Grower Crowd, When engaging in new construction or renovations with borrowed funds, you can add the interest you or your company pays on the loan to the basis of your property and depreciate it over 27.5 years, under the same depreciation schedule as standard commercial property, per Internal Revenue Code Section 1.263A-1. Value-add properties are also eligible to be added to a 1031 Exchange to defer taxes on capital gains, which can allow you to reinvest your gains each year, while not having to pay Uncle Sam until you withdraw your investment.
How Can A Good Sponsor Add Value And Maximize Reward
To understand how a good sponsor can maximize upside, consider this example of when Trion turned a value-add property into an extremely profitable asset and exited with a nearly 20% IRR for their investors.
In March 2017, Trion acquired an asset for $36.6 million. They put $4 million in renovations and improvements and made the property highly desirable for new tenants and increased the NOI by 31%. Trion exited the investment in December 2019 after boosting the value to $51 million and providing an IRR to investors of 19.6%.
With only a 2.5-year investment term length, the example above is just one way in which working with a good sponsor can benefit you.
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Check If The Investment Fits Into Your Portfolio And Timeline
For good reason, different investments draw different crowds. Income-producing, stable core investing is enticing to older investors not because the potential returns are high but because the potential risks are low .
However, if youre a younger investor or an investor who can weather potential volatility, value-add property investing has the potential to be a fantastic addition to your portfolio.
Additionally, read more about one of the key benefits to real estate investing: the tax benefits. From the 1031 exchange to depreciation write-offs, value-add investing maximizes all of the potential tax benefits.
Adding Value To Commercial Real Estate
As weve mentioned before, investors choose commercial real estate because commercial real estate provides high yield returns consistently. However, many investors look to increase those returns by adding value to their properties. Adding value to a commercial real estate property is done in two ways adding value by market appreciation and adding value through property improvements.
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What A Value Add Real Estate Investment Strategy Really Means
So there you have it. Just like a five-paragraph essay, the five phases of a value-add real estate syndication give structure to the investment, let investors know what to expect, and allow the sponsors to focus on the work at hand.
During the projected hold time of a value add real estate syndication, the property will typically go through these five phases:
Make Sure The Firm Is Reputable With A History Of Solid Returns
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After youve determined that the market and property type are in line with your particular portfolio and broader economic predictions, do some digging on the returns of the private equity real estate group itself.
This process is as simple as asking the prospective investors about their annual returns and their expected returns for an investment that theyre making soon. Seek examples of past investments and the performance of them. Look for proven track records. If theyre experienced, theyll be happy to provide investors with any information that they want to know.
Questioning the firm is especially important if theyll be responsible for restructuring the management of the property. As mentioned above, many properties need intangible and tangible work. Its important to evaluate the company on their ability to improve those intangible assets, so that theyre prepared to deal with management and operational issues.
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How Is Roi Calculated For Real Estate Investments
Below are several ways that you can calculate ROI for real estate investments depending on the circumstances. What is important to remember is that when comparing multiple properties you should include the same line items in each calculation.
How To Find Value Add Real Estate
Though there are numerous distressed rental properties out there, it might not be easy to find the right one for you. Here are some great tips for finding cheap real estate:
- Join real estate investment groups â Many neighborhoods have local investment groups that converge frequently to offer networking and educational opportunities to their members. Quite often, they will also have property listings in their monthly newsletters or websites. NationalReia.org is a great place to find investing groups in different states.
- Find listings on the internet â There are numerous lists online that contain short sales, foreclosures and value add real estate. While some of these lists are free, others require a small fee for access.
A good example is the Mashvisor Property Marketplace which allows you to sort your lists by zip code, town, and city. You can also use filters such as budget, rental strategy , number of bathrooms and bedrooms.
Visit the Property Marketplace today to find foreclosures, short sale properties, bank owned homes, and auctioned properties that can be used for your value add investment strategy.
Once youâve found what you are looking for, here is how to add value to property:
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How To Calculate An Roi
ROI is calculated by comparing the total amount you have put into the property, with the initial purchase price as well as any further costs, to its current value. To calculate a return on investment you would take the net income and divide it by the total cost of the investment or ROI + Net income / Cost of investment x 100.
Below is an example of the ROI calculation:
Net Income: $12,500/year divided by
Down Payment: $50,000 = .25
.25*100 = 25% ROI-> in four years you will get your money back
ROI is not how much money goes into the property, but its more about how fast the money comes out.
Property Underwriting Variables Critical To Value Add Real Estate Investing
How do private equity real estate firms know if an office or multifamily property is worth the investment risk? Will it turn a profit and increase in value, or underperform and lose money? Thats where underwriting comes in the process of evaluating a property to determine its viability and potential.
When done right, property underwriting is a complex and rigorous process. It involves analyzing the consequences of hundreds of variables from the assumed purchase price of a property relative to its competitive set to replacing HVAC to the cost of a fresh coat of paint. All these details can make or break the desired return and have a significant role in the real estate underwriting process. However, some have a greater impact on returns than others.
At Origin, we have developed a rigorous underwriting model to analyze every investment that goes into our private real estate funds. This not only ensures consistency and efficiency in our property underwriting, it increases our ability to make investments that will meet, or exceed, our expectations. While we look at dozens of variables, five of these factors play a more critical role when were analyzing any real estate investment were considering:
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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?
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!
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Real Estate Investment Trusts
A real estate investment trust is best for investors who want portfolio exposure to real estate without a traditional real estate transaction.
A REIT is created when a corporation uses investors money to purchase and operate income properties. REITs are bought and sold on the major exchanges, like any other stock.
A corporation must payout 90% of its taxable profits in the form of dividends in order to maintain its REIT status. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits and then have to decide whether or not to distribute its after-tax profits as dividends.
Like regular dividend-paying stocks, REITs are a solid investment for stock market investors who desire regular income. In comparison to the aforementioned types of real estate investment, REITs afford investors entry into nonresidential investments, such as malls or office buildings, that are generally not feasible for individual investors to purchase directly.
More importantly, REITs are highly liquid because they are exchange-traded trusts. In other words, you wont need a real estate agent and a title transfer to help you cash out your investment. In practice, REITs are a more formalized version of a real estate investment group.
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Tend to be illiquid with lockup periods
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Management fees