SS99: What Is Value-Add Real Estate?

There are many investment strategies that multifamily investors are able to pursue. In this episode, Charles discusses what value-add real estate investing is and why real estate investors have been able to achieve strong returns by utilizing the value-add investment strategy.

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Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is value add real estate.

New Speaker:
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New Speaker:
Value add Commercial real estate investors typically target properties with in place cash flows, but are not operating at their full potential.

Charles:
The investor’s goal is to increase that cash flow during the investment whole time by making improvements to the property. The changes that value add operators instill in a property include physical improvements, repurposing vacant space to income producing space like adding storage lockers, for example, changing management, lowering expenses with the goal of maximizing the profitability of the property. Value add, investors will typically use medium to high leverage to fine their deals, which increase returns for the investors and for themselves as operators. Once the operators have increased the net operating income of the property, they’ll usually sell or refinance for all long term halt. In either situation, the operator and the investors are capturing the equity that has been created. Now, value add investing is really the sweet spot of both risk versus return. It is not as risky as building a new asset and has in place cash flow as is day one, but the returns will be higher than just purchasing a newly renovated property and renting it out, such as like a yield plan.

Charles:
So what does a value add property look like? You, well, you’re looking for below market rents, low occupancy rates, low economic occupancy rates, so people actually paying rent, physically outdated property, exterior and interior and mismanagement. What are the different levels of value add projects? Well, there’s light value add and you’re refreshing the units, new paint, new carpet, new lighting, plumbing fixtures, new USB electrical outlets. Some exterior upgrades could be improved landscaping, new paint, retrying the parking lot. Renovating amenities is typically pretty easy since it can be done without losing revenue or disrupting tenants, making the property look newer and more updated with minimal investment. Heavy value add. A heavy value add contains everything from a light value ad, but may include getting the property to the studs, reconfiguring walls adding a building or removing one. A medium value add is mixture of both.

Charles:
It’s performing all the light value add tasks while fully renovating bathrooms and kitchens, for instance. And that’s really where a lot of syndicators and operators will stand because that’s where you’re gonna get the highest return on the money invested in most cases. What is the process of repositioning a value add property number one is changing the property management company. They have not managed it correctly, and whether that is because of the negligence or because of the previous owner was too cheap, they need to go. In most instances, your new management company will be less expensive than the previous one. With the new manager in place, non-paying tenants are a victim and tenants are instructed that the new manager will be stricter on late payments and adhering to the lease that was signed. Number two is reducing expenses you most likely saved when you switch managers.

Charles:
And this is also included in the switching to new vendors. Mismanaged properties are typically overcharged by vendors because they’re not putting out any of these contracts bid annually. Like a lot of active investors like we do with our properties performing exterior, common area upgrades, painting landscaping roofs, windows mechanicals, adding lights and security, possibly adding amenities, but definitely upgrading the current amenities like a new dog park, new pool deck, new outdoor kitchen, new fitness center, or just renovating those performing interior upgrades, hallways, common areas and unit renovations. And most value ads will rebrand the property and then they will start marketing to new tenants. Because usually one of the things you’re looking at when you’re looking for a property that has a value add candidate is it’s gonna have poor reviews. So you want to just get rid of that whole, the old name.

Charles:
You want to rebrand the property and new signs new website, the whole nine yards, and then you’re gonna remarket it with a clean slate. What we look for when targeting value add properties, first, it needs to meet our requirements for a growing market. You can check episode SS one and SS two where I talk about what we look for in markets won’t we invest into. They also need to be a b or above neighborhoods, and this is very important. Yes, you can do value ads and Cs, and we’ve done that before. We focus on B minus and above neighborhoods. And this is because we’re gonna get more of a mix of we’re gonna get better tenants and we’re gonna get more of a mix of not just cash flow, but also appreciation. We look for properties built after 1980, and when you’re buying eighties or nineties or later built properties, you’re avoiding a number of issues that you get with a lot of younger older properties.

Charles:
Aluminum wiring, lead paint, along with a minimal chance of the property containing, you know, stab, lock al panels or asbestos. So when you’re buying 1980 and above, you’re really avoiding a lot of those hassles that come with properties that are pre 1980. We wanna see similar nearby properties that have been renovated and compare the rent with the target property rents. You know, are you able to increase rents at the target property by 20 to 25% during the value value add and make sure when you’re doing those comparisons it’s apples to apples. You know, you really want to see something where someone has there’s an a comp, a close property that’s similar vintage, so built around the same year, and they’ve done a value add on it and they’re getting rents that are like 30% higher. Then, you know, you can go in conservatively, you can probably get without an issue 20%, maybe 25%, but you do your numbers on like 20% during the value add process. If yes, it might be a possible opportunity and you can start the full underwriting process. So I hope you enjoyed, Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. Look forward to more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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