Understanding Value Add Real Estate

One of MC Companies’ investment models is our value add investments. Value-add properties remain extremely popular among multifamily investors. These investors aim to increase the revenue of a property by creating value through property upgrades or potential that is unseen by the current owner. Success in the value-add space requires knowledge of rental rates and increases based on improvements. It should never be guessed. You have to understand the particular market and comps to make sure the numbers work. The money you put in you should be able to get back by the increased rents. You also need to make sure the area can support the rental increase.

One way to add value to a property is through operational enhancement opportunities. Examples include raising rents to market levels, initiating or enforcing fee income policies, such as pet fees and late fees, and reducing expenses. At MC we look at this when buying a value add property. How is the current owner running the place? Are they letting rent sit on the table?

Another thing MC looks at are what capital improvements can we put in place to make the property more desirable? Interior upgrades are the most common and measurable. We like to upgrade countertops and kitchen appliances for example. Bathrooms are another nice upgrade. if you own the building the clubhouse and gym need to be in pristine condition as well.

I don’t think you should try and do a value add unless you thoroughly understand the market. While some investors find success in value add on instinct, I don’t do anything on instinct. I am more analytical. I look at the numbers. You have to look at cost vs reward to similar properties in the area. It all comes down to the ROI. Underinvesting in upgrades can leave potential revenue on the table or make your units inferior to other upgraded units in the area, while overspending and not getting the rents you thought you would can put you in hot water with investors.

A lot of investors feel they understand value add properties due to the rapid rent growth and low-interest rates that have benefitted value-add investors in the last few years. Going forward, as rent growth stabilizes and interest rates increase, value-add success will become increasingly dependent on investors’ market awareness, ability to adapt, and adherence to a disciplined strategic plan. Like everything in this market, when the chips fall we will see who truly understands the market.