Real estate investors have a variety of strategies to consider when purchasing properties to invest in. Some focus on rental income, while others aim to increase property value through capital growth. However, it’s rare that an investment property provides both.
For those investors looking to increase both returns and value, value-add properties may be a good fit. A value-add strategy involves purchasing a property that requires substantial improvement to reach its true market potential, either through renovating or rebranding. By doing so, investors can increase cash flow and eventually sell the property at a higher price. Read more https://www.illinoisrealestatebuyersinc.com/we-buy-houses-itasca-il/
Generally, value-add opportunities can be found in properties with low or negative cash flows at the time of purchase. The property may be struggling due to a management issue, physical condition of the building or vacancy rates. In some cases, the property’s value can be improved by addressing all of these issues at once through an extensive renovation.
The key to a successful value-add investment is to find the right opportunity for your needs and risk tolerance. To do so, first, determine what your investment goals are and identify the types of properties that will help you achieve them. This may involve speaking with an industry professional, such as a certified financial planner, home lending specialist or commercial broker.
After identifying your goals, you can start the process of finding a property to purchase. There are several property types that are commonly considered for valueadd investments, including core, core plus, and value-add opportunistic. Core real estate investments are those with stable cash flows and a low debt-to-asset ratio. They’re often compared to bond investments because of their stability and lower risk.
However, core real estate investments offer lower returns than value-add and core plus properties. That’s because the majority of their return is generated through cash flow rather than appreciation. In general, value-add and core properties require more work and have a higher level of risk.
Depending on the type of property, value-add opportunities can range from a simple cosmetic renovation to a major overhaul that will transform an entire building. One common example of a value-add renovation is upgrading the tenant mix to attract a more attractive user base. In the multifamily sector, this could mean adding amenities such as dog parks or fitness centers.
Another way to add value is by lowering operating expenses. For instance, reducing the number of utility bills or renegotiating lease terms can reduce a property’s operating costs and increase net operating income.
Finally, aggregating assets to create scale can access deep value that would not be available if the individual assets were liquidated separately. For example, a group of ten 10-unit apartment buildings may be able to leverage cap rate compression at sale that each property individually cannot.
Regardless of the amount or complexity of improvements, it’s important to realize that value-add investing takes time and patience. Investors can expect to receive most of their returns after the value-add process is complete, which may take two to three years. As a result, this is typically an investment option for those with a longterm investment horizon and moderate to aggressive risk tolerance.
