SS261: The Value-Add Process

SS261: The Value-Add Process

The value-add process is the backbone of increasing property value in multifamily investing. In this episode, Charles discusses the value-add process his firm follows with each of their properties.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

  • The term “value-add” is commonly used in apartment investing and commercial real estate investing as a whole. But what does “value-add” investing actually mean, and what is the process for executing a value-add multifamily business plan?
  • Value-add multifamily investing involves buying an underperforming apartment complex, making significant physical and operational improvements that allow the owners to increase their rents, which increases the property’s net income, which then increases the property’s value. Once the property’s value has increased, the owners can refinance or sell it to realize some or all of the value they have created.
  • Our firm utilizes a 5-step value-add process, and we slightly modify it depending on the specific deal, but the overall framework stays the same. This process leaves out deal sourcing and underwriting and rather focuses on the process once a property is under contract.
    • 1. Addressing Property Issues Before Closing. Conduct a detailed assessment of the property—evaluating all of the units, systems (HVAC, plumbing, electrical), common areas, and the exterior. This assessment of potential improvements will highlight both immediate repairs and longer-term upgrades. 
    • 2. Prioritizing Deferred Maintenance and Improving Curb Appeal Over Immediate Rent Increases. Assign each potential improvement a priority ranking—based on cost, rental upside, tenant satisfaction, and compliance needs. High-impact, low-cost items are tackled first. In other words, leaking roofs and water heaters, along with defective HVAC systems, are addressed first. During this step, we will also phase out vendors we are not continuing with and bring on board the new property management.
    • 3. Building Positive Relationships and Goodwill with Tenants. Schedule and phase renovations strategically. For example: Exterior/interior painting and landscaping in spring/summer. HVAC replacements in the offseason to minimize tenant disruption. Review the rent roll and update the information for the tenants living at the property. Who is living in the unit? Are they on a lease? Where do they work? Are the numbers and emails we have for them correct? Additionally, we will work to complete common area renovations while addressing all deferred maintenance items.
    • 4. Strategically Renovating Units to Achieve the Highest Possible Rent Increases. Focus on upgrades that tenants care about: new appliances, updated fixtures, fresh flooring, improved lighting, or added amenities. The goal is to boost rents and tenant retention. Stagger the renovations as units come up, with a focus on how many units we want to renovate per month. If we have a 50-unit building, maybe we want to limit the renovations to 2 per month. If we have five vacancies one month, we will renovate the two units in the worst condition and re-rent the other three as is, after some painting, cleaning, and repairs. 
    • 5. Optimizing Overall Property Operations. Define and monitor key success indicators—rental income, occupancy rates, turnover, and maintenance spend. Use these metrics to tweak the plan, reallocate funds, and inform future investments. Strategically renew tenants and maintain some on a month-to-month basis in order to try to best keep the lease end times spread as evenly as possible from January to October. November, December, and January are slow months for renting, so we want to limit the move-outs we have during this time.
  • To recap, we are addressing property issues before closing. Prioritizing deferred maintenance and improving curb appeal over immediate rent increases. Building positive relationships and goodwill with tenants. Strategically renovating units to achieve the highest possible rent increases and optimizing overall property operations.
  • To learn more about what renovations add the most and least value, check out episodes SS219 and SS235.

Transcript:

Charles:
What if you could take a tired, underperforming apartment complex and turn it into a high value income reducing property? I’ve been investing in multifamily real estate since 2006, and when we perform a value add renovation, we follow this exact five step process. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re breaking down the value add process, the five essential steps we use to transform underperforming properties into profitable investments. So let’s get started. The term value add is commonly used in apartment investing, in commercial real estate investing as a whole, but what does value add investing actually mean and what does the process for executing a value add multifamily business plan? So value add multifamily investing, it involves buying an underperforming apartment complex, making significant physical and operational improvements that allow the owners to increase their rents, which increases the properties that income, which then increases the property’s value.

Charles:
Now, once the property has increased in value, the owners can refinance or sell it to realize some or all the value they have created. Now our firm utilizes a five step value add process and we slightly modify it depending on the specific deal, but the overall framework stays the same, and this process leaves out deal sourcing and underwriting, but it rather focuses on the process once a property is under contract. So let’s get started. Number one is addressing property issues before closing. So we conduct a detailed assessment of the property evaluating all the units and systems. This is like hfa, plumbing, electrical, the sewer lines, common areas, and the exterior. And this assessment of potential improvements will highlight both immediate repairs and then some longer term upgrades. Number two is prioritizing deferred maintenance and improving curb appeal over immediate rent increases. So now we assign each potential improvement, a priority ranking based on cost rental upside 10 satisfaction and compliance needs.

Charles:
The high impact low cost items are tackled first, and in other words, leaking roofs and water heaters along with effective HVAC systems are addressed first. And then during this step, we will phase out vendors we are not continuing with and bring on board the new property management. Number three is building positive relationships in goodwill with tenants. So we’re scheduling and phasing renovations strategically. For example, exterior and interior painting and landscaping is done in the spring and summer. HVAC replacements in the off season to minimize tenant disruption, review the rent roll and update the information for the tenants living at the property. So who’s living in the unit? Are they on a lease? Where do they work? Are the numbers and emails we have from ’em still correct. Additionally, we will work to complete common area renovations while addressing all deferred maintenance items. Number four is strategically renovating units to achieve the highest possible rent increases.

Charles:
So focus on upgrades that tenants care about. So that’s new appliances, updated fixtures, fresh flooring, improved lighting or added amenities. And the goal is to boost rents and tenant retention. So we wanna stagger the renovations as units come up with a focus on how many units we wanna renovate per month. Now if we have a 50 unit building, we wanna limit the renovations to two per month, and if we have five vacancies one month, we will renovate the two units in the worst condition and then re-rent the other three as is after some painting and cleaning and minor repairs. Number five is going to be optimizing overall property operations. So we define and monitor key success indicators, KPIs, and this is like rental income, occupancy rates, turnover, maintenance spend. And we use these metrics to really tweak the plan and reallocate funds and inform future investments.

Charles:
So strategically renew leases and maintenance some on a month to month basis in order to try and best keep the lease end times spread as evenly as possible from January to October. So November, December and January are slow months for renting. So we wanna limit the move outs we have during this time. And to recap, we are addressing property issues before closing, prioritizing deferred maintenance and improving curb appeal over immediate rent increases. We’re building positive relationships in goodwill with tenants strategically renovating units to achieve the highest possible rent increases and optimizing overall property operations. So learn more about what renovations add the most and least value. Check out episodes, SS 2 1 9, and then episode SS 2, 3, 5. Thank you so much for watching. Please remember to rate, review, subscribe, submit, comment to matzo show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com.

Charles:
That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS219: Transforming Properties: The Untold Value of Minor Renovations
  • SS235: Renovations That Don’t Add Value

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Scroll to top